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Due to the consensual character of arbitration, the arbitration agreement and the provisions of the new laws dealing with its formal and substantive validity and the arbitrability of the subject matter of the dispute have a decisive impact on the quality of the new laws and their attractiveness for parties and arbitration practitioners alike. These factors determine the ease of administration and the practicability of a modern arbitration law for two reasons. First, the international commercial community is depending on regulatory simplicity if it comes to the application of domestic rules to the conclusion of cross-border transactions. In the everyday practice of international economic transactions, where contracts are frequently negotiated under heavy time pressure, parties may find it sometimes difficult to comply with the rigid formal validity requirements of the national arbitration laws if the contract is concluded over long distances through electronic communication media.614 Quite often, they may not even be aware of these requirements of the domestic law. This strong need for easy administration of the arbitration clause has to be weighed against the need for protection of the parties that oust the jurisdiction of the competent state courts with the arbitration agreement which underlies every formal validity requirement of domestic arbitration law. Secondly, in everyday arbitration practice, arbitral tribunals and domestic courts are increasingly confronted with the alleged violation of these rules and norms by respondents trying to evade the arbitration to which they have previously agreed in the contract. This may happen at an early stage of the proceedings when it comes to the enforcement of the arbitration agreement615 or to the appointment of the arbitrators by the courts,616 or later on during the arbitral proceedings if the local judge is called upon to act as juge d'appui.617 Such tactical maneuvres are also encountered after the rendering of the award when the defendant seeks to have the award set aside before the courts of the seat of the arbitration618 or when the claimant tries to have the award enforced before foreign courts under the enforcement system of the New York Convention.619

It becomes clear from this short tour d'horizon that the legal rules governing the arbitration agreement and the adherence to them by the parties have a decisive impact on the smooth running of the arbitral proceedings. The crux of the matter lies in the fact that these provisions aim at a point in time which lies well ahead of the commencement of the proceedings, namely the moment of the conclusion of the contract and the arbitration agreement contained therein, when the parties usually do not even consider the possibility of dis-

putes arising between them. Even if the applicable law does not impose rigid requirements the parties should therefore not adopt a laissez faire attitude towards the drafting of the arbitration agreement. Instead, parties are well advised to be more demanding than the law usually is and to draft their arbitration agreement in a form and with respect to subjects which cannot later give rise to any discussion as to their intention to resort to arbitration.620

If, in spite of these precautions, a dispute arises over the validity of the arbitration agreement, the task of the tribunals and the courts would be made much easier if all questions pertaining to the validity of the arbitration agreement would be governed by the same law. From a theoretical point of view, this aspired-to synchronization of legal systems applicable to the arbitration agreement and the arbitral proceedings621 is hard to achieve, since the various elements that bear on the formal or substantive validity of the arbitration agreement are partly governed by conflict-of-laws rules, and partly, for reasons of efficiency and practicability, by substantive legal rules of international private law. In addition, the rules of domestic arbitration law are superseded by unified treaty law, the relation of both being sometimes far from clear. What makes things even worse is that the arbitration agreement may be looked at from four different angles.622 The legal viewpoint may change depending on whether questions pertaining to the validity of the arbitration agreement have to be decided by the arbitral tribunal itself, the competent judge at the seat of the arbitration as juge d'appui or in setting-aside proceedings or by the foreign judge who is dealing with an application to recognize and enforce the award. In spite of the substantial progress made in recent years in the unification of international arbitration law, the assessment of the formal and substantive validity of the arbitration agreement still resembles a "legal puzzle game".623

Fortunately, this complex legal pattern is based on solid dogmatic ground. Two fundamental principles serve as a safe starting point for the analysis of the arbitration agreement under all arbitration laws. First, agreements about existing disputes (Schiedsvertrag, compromis, 'submission agreement') and, more important in practice, about future disputes (Schiedsklausel, 'arbitration clause', arbitraal beding, clause compromissoire) are subject to the same rules.624 Secondly, all legislatures maintain the principle of 'autonomy' or 'severability' of the arbitration clause, i.e. both kinds of arbitration agreements have to be judged independently from the main contract and under a law which

may be different from the one that applies to the principal contract.625 Defects which lead to the invalidation of the main contract do not necessarily affect the arbitration clause contained therein. This is true even for cases where the initial invalidity of the contract is due to fraud in the inducement or similar allegations relating to the initial invalidity of the main contract.626 The arbitral tribunal may therefore decide that the main contract is invalid without destroying the basis of its own jurisdiction. The invalidity of the contract will, however, extend to the arbitration agreement if the contract was non-existent ab initio due to a lacking official approval from the government or other public authority, a missing power of attorney, coercion or personal incapacity of one of the parties as well as other defects pertaining to the personal capacity of the parties to enter into contractual relationships and the arbitration agreement has been concluded together with the contract.627 A contrary decision would disregard the fact that, as a matter of commercial reality, the arbitration agreement forms an integral part of the contract. The contract may also be invalid for other reasons, such as violation of Art. 85 of the EC Treaty, thus

involving aspects of arbitrability.628 In these cases, the doctrine of severability applies, albeit rather for practical reasons and due to the respect for the will of the parties than for strictly dogmatic grounds, since the nullity of the contract might as well be seen as extending to the arbitration agreement incorporated in it.629 In spite of these dogmatic fractions, the severability rule has already developed into a transnational principle of international economic arbitration law.630

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Both the new laws and Art. II Sec. 2 of the New York Convention accept the arbitration agreement as formally valid if it is contained in a contract which is signed by the parties or in an exchange of letters, telegrams or telex/telefax722 messages which need not necessarily be signed by the parties or refer to the arbitration agreement. Going beyond the current case law relating to the New York Convention, the new laws leave room for arbitration agreements concluded through other modern means of telecommunication and data transmission such as "EDIFACT",723 "Teletex", "Btx",724 "electronic courier", data transmission via satellite and other means of electronic data inter-change (EDI) which are still unknown today.725 These means of communication may establish a formally valid arbitration agreement, if they help to record the body of the agreement for future proceedings and make the parties aware of the fact that they oust the jurisdiction of domestic courts. However, one should include only those agreements that appear on a computer screen and are then saved in the memory of the computer terminals.726 Only in these cases is the text of the arbitration agreement and the conditions of its conclusion known to the parties at the time of its conclusion and also the agree-

ment can be reproduced in written form later. Thus, the arbitration agreement is reproduced in "visible and sufficiently permanent form".727 The possibility of having the agreement reproduced at a later stage complies with the formality requirements of the new arbitration laws as soon as the message is stored in the computer memory. A recent UNCITRAL survey on contractual interchange agreements - which do not have the force of statutory law but apply only if the parties concerned have so agreed - that have been or are currently being developed in various sectors of business activity, reveals that even though the content of such agreements varies considerably according to the various needs of the different categories of users they intend to serve, there are some generally accepted principles as to the necessary quality of EDI messages. In order to put EDI messages and paper documents on an equal footing with respect to formal validity requirements, one has to require that

- the parties involved in the data transmission process expressly agree that receipt of an EDI message shall have the same force and effect as the exchange of paper documents and shall be considered to be "in writing";

- the identification, authentication and verification of electronically exchanged documents is ensured through some kind of "call-back" and/or test-keys (identification of the transmitting machine) and an electronic identification consisting of a specified symbol, code or digital signature which has to be affixed to or contained in each document transmitted by such party and which this party acknowledges as sufficient to verify that this party originated such document;

- all parties involved in the data transmission process are required to keep a record or "log" of the EDI messages, meaning that the recording methods employed by the parties preserve both sent and received messages in their original format, provide a chronological record of those messages and that they ensure that the recorded EDI messages are accessible in a human readable form, for example through a printing device.728

It can be foreseen that commercial situations involving the use of EDI will undoubtedly become more frequent in the near future as EDI will develop into

a more widespread technology evolving from closed networks to a more open environment particularly through the use of integrating systems which bring different EDI networks into contact. These modern means of telecommunication should therefore ultimately be included in the autonomous interpretation of Art. II Sec. 2 New York Convention, since the text of the Convention is adaptable to technological changes. The text of the Convention mentions only "telegrams" which constituted the most modern means of long-distance communication in the 1950s when the Convention was negotiated. This has not prohibited domestic courts to adopt a more liberal approach towards the interpretation of the Convention.729 The underlying rationale of this provision, which should be the guiding maxim in a "reality-oriented" interpretation730 of the Convention, was to take account of the particularities of long distance transactions.731 The character of these transactions has changed markedly in the past decades and will still continue to assume new and faster forms of data transmission. The latest revision of the INCOTERMS are based on the assumption that transport documents will be replaced by messages of electronic data transmission.732 The new ICC Uniform Rules For Demand Guarantees acknowledge that "[t]he expression "writing" and "written" shall include an authenticated teletransmission or tested electronic data interchange ("EDI") message equivalent thereto".733 Likewise, the International Maritime Committee (CMI) has developed "The CMI Rules for Electronic Bills of Lading".734 The final point of this development has not yet been reached.735 Technology in this field changes so rapidly that document practices which have been accepted for years worldwide can be outdated within a short period of

time.736 Such transport documents usually include an arbitration agreement, mostly through reference to a set of standard contract conditions.737 The autonomous interpretation of Art. II Sec. 2 New York Convention has to take into account this development of contemporary commercial practice.738 One might even go so far as to say that the wide uniform interpretation of the formal validity requirements contained in the new laws might eventually lead to a more liberal interpretation of the Convention.739 In all the cases listed above, the on-line computer or satellite link and the storage on the computer discs suffice for the exchange of documents required by the text of the Convention.740 If, however, there exist documents signed by either party but there is neither a formal exchange nor a computer link between the parties, as in the case of "office-memoranda" about the conclusion of a contract via telephone,741 the arbitration agreement is not covered by the Convention but would still be within the scope of the new Dutch and Swiss law which do not require an "exchange" of documents.742 In most of these cases, the question of dispute settlement is not dealt with expressly but left to the general contract conditions which are included in the contract by a sweeping reference to fill the contract with life.743

In any case, both the strict requirements of the New York Convention and the liberal provisions of the new laws are complied with, if, after a dispute has arisen, the parties initiate arbitration proceedings by exchanging documents, telex messages or by another means of communication mentioned above in which they expressly refer to the possibility of arbitration. If the claimant makes a proposal by telex and by letter to submit a dispute to arbitration and the defendant designates his arbitrator in a telex message which refers expressly to the messages of the counter party the parties have met the formal validity requirements of the Convention.744 Even at a further moment in time, parties may establish the competence of the arbitral tribunal through a formally valid

arbitration agreement if they exchange (written) statements of claim and defense in which the existence of an arbitration agreement is alleged by one party and not denied by the other.745 This alternative applies only to the arbitration procedure itself and not to related proceedings before a domestic court.746 Indeed, one may be able to bring these cases under the New York Convention since the procedure comes close to the exchange of letters mentioned in Art. II Sec. 2 of the Convention.747 As these cases require an express reference from only one of the parties, while the other party acquiesces in the initiation of the arbitration, they come close to establishing the tribunal's jurisdiction through the foreclosure rules contained in Art. 16 Sec. 2 ML, Art. 1052 Sec. 2 Dutch Act and applied under the general principle of non concedit venire contra factum proprium where the jurisdiction is based on the fact that the respondent is estopped from invoking the invalidity of the arbitration agreement once he has submitted his defense on the merits.748 The effect of both formal validity and foreclosure rules is the same: the tribunal can proceed notwithstanding objections as to its jurisdiction based on the absence of a valid arbitration agreement. The difference is that in the case of Art. 7 Sec. 2 ML and related constellations, written statements exist from both parties while under the preclusion rules the tribunal's jurisdiction is established by the mere

procedural conduct of the respondent party. This may have consequences if it comes to the recognition and enforcement of the award and the submission of the written arbitration agreement is required by the lex fori of the enforcement judge. This differentiation is, however, a rather theoretical one as virtually every arbitration is introduced by an exchange of written documents from both parties, the request for arbitration or a statement of claim that refers to the arbitration agreement and the respondent‘s written answer.749

If doubts still remain as to the validity of the arbitration agreement, the formal requirements of the new laws may be complied with if the parties sign the "Terms of Reference" set up by the tribunal750 unless one of the parties includes an express reservation as to the validity of the arbitration agreement. If the parties make a statement in the minutes of the proceedings the tribunal must ensure that the minutes are signed by the parties in order to create a formally valid arbitration agreement.751

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Parties who are dissatisfied with the conduct of the arbitral proceedings and the outcome of the case may consider to sue the arbitrator(s) for damages. Contractual claims for damages for the alleged 'wrong' decision of the case can be based on the contract between the parties and the arbitrator only in very rare cases. As in the case of the parties' action for specific performance of the receptum arbitri, this restrictive view is a direct consequence of the arbitrators' unique position which, at least with respect to the characteristics of his decision-making, resembles that of a judge in the ordinary court system. To ensure their free and independent decision-making, the arbitrators are granted far-reaching immunity from liability. The NAI provides an express waiver of liability clauses in its arbitration rules246 which becomes part of the contract between the parties and each arbitrator. Contrary to the broad wording of the clause and the broad liability granted under American law, general contract law forbids to extend this waiver to liability for grossly negligent or willful acts or omissions in the decision-making process247 . Even if neither the applicable arbitration law, nor the arbitration rules, or the receptum arbitri contain special exclusion of liability provisions, the contract between parties and each arbitrator contains an implied limitation of liability248 . As the Florida Task Force on International Arbitration has noted:

'Arbitrators are not less vulnerable on [the liability issue] than are judges, and both are entitled to immunity. Indeed, unless they are protected it will be difficult to get good people to serve as arbitrators, or to convince 237

arbitrators to reach decisions without being influenced by the likely reaction of a party.'249
This limitation of liability is also applicable under Swiss law.250 German law goes even farther in that it shields the arbitrator from liability relating to his decision-making unless he commits crimes such as the unlawful acceptance of benefits or corruption under §§ 331 et seq. of the German Criminal Code.251 As the arbitrator is remunerated by the parties, he may run the risk of being accused of such crimes simply by demanding compensation for his services. Consequently, § 335 a of the German Criminal Code clarifies that an arbitrator's remuneration constitutes such crime only in those cases where the arbitrator demands or receives it 'behind the back of the other party'. Here, the German criminal law takes account of the Joint liability of the parties and the dangers of partiality where contacts between arbitrator and one of the parties are too close.252 The mere fact that the award has been set aside by the competent court may not in and of itself serve as a basis for arbitrator liability.253 However, a successful appeal against the award should be considered as a necessary precondition for a suit against an arbitrator for negligent or wrongful decision-making.254 A party who accuses the arbitrator of having rendered a wrong decision, but does not attack the award with the means provided for by the arbitration laws has to be suspected of using the suit against the arbitrator as a Surrogate for the missed opportunity to have the award set aside.

A possible liability of the arbitrator might arise out of undue delay of the proceedings255 or unjustified repudiation of his mandate256 - in both cases 238 the immunity of liability, which is limited to the actual decision-making of the arbitrators, does not apply - or from the, albeit highly unlikely, evident misuse of his office.257 Usually, these and similar kinds of misconduct on the part of the arbitrators will not result in a suit for damages. Instead, parties prefer to challenge the arbitrator and have him removed by the arbitral institution or the court.

Finally, the question remains whether the arbitrator's duty to create an enforceable award arises out of his mandate with the parties, thus implying that a violation of this duty could render the arbitrators contractually liable. This view is maintained in German doctrine.258 There is no doubt that in conferring authority upon an arbitrator to settle a dispute arising out of an international transaction, a term is implied in the parties' contract with the arbitrator that he will render an award which is enforceable under the New York Convention.259 A court judgment rendered in international proceedings will frequently be enforced against assets located in the Jurisdiction where the court has its seat, thus relieving the judge from considering possible enforcement problems abroad. The international arbitrator, however, sitting in a neutral forum that usually has no connection with the business of either of the parties, carries an enhanced responsibility for the enforceability of his award abroad under the New York Convention or domestic enforcement provisions.260 Art. 26 ICC-ArbR261 is thus the expression of a general principle of international economic arbitration. However, ensuring the enforceability of the award is a difficult task, given the multitude of possible enforcement fora. Sometimes, ensuring enforcement will even prove to be impossible if the arbitrators have to reconcile conflicting ordre public principles of those enforcement fora which 239 they are aware of.262 Therefore, the international arbitrator's Obligation to ensure the enforcement of the award is a purely procedural Obligation, a nobile officium which every arbitrator has on his checklist.263 It is converted into a contractual duty only in those cases where a party draws the arbitrator's attention to a public policy issue which might stand in the way of enforcement of the ultimate award. Even in these cases, though, a contractual liability of the arbitrator is in place only if a prima facie examination of the case reveals that the arbitrator could have easily avoided the problem, the proof of which will be impossible in most cases.

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All arbitration laws provide special conflict-of-laws rules to be applied by the arbitrators.109

Art. 187 Sec. 1 of the Swiss SIPL requires the arbitrators to apply an objective test110 and decide the dispute 'according to the rules of law with which the case has the closest connection'. The Italian legislature has also followed this approach in its draft law on international arbitration.111 Imposing a specific choice of law rule on the arbitrators which is well known from international contract law112 seems conservative and reactionary given the liberal attitude of the new Swiss arbitration law.113 It also stands in strange contradiction to the rest of the law which provides parties and arbitrators only with a very basic procedural framework leaving the filling of the legislative gaps to the party autonomy or the procedural discretion of the parties.

The ML advocates the classical114 'indirect' or 'conflictual' method. This approach is similar to the new Swiss law in that it also refers to conflict-of-laws rules. Yet, it is more liberal than the Swiss law because the ML does not impose a special conflict-of-laws rule to be used by the arbitrators. Instead, Art. 28 Sec. 2 ML provides that the arbitrators may determine the applicable law by the conflict-of-laws rules which they consider applicable.115 Similar provisions are included in the DIS-ArbR and the ACB-ArbR.116 In international arbitral practice, the tribunals either refer to the conflict-of-laws rules of the seat117 or make a synopsis of the conflict-of-laws rules of those countries that have a sufficient connection with the case.118 Thus, the arbitrators frequently refer to the convergence of the conflict-of-laws systems of the 498 parties' home countries to make the award more convincing and palatable to the parties.119 Increasingly, the comparative approach outlined above in the context of the interpretation of the arbitration laws120 can also be found in the arbitrators' determination of the applicable conflict-of-laws rules. The tribunals apply those conflict-of-laws rules which are common to all or at least the leading legal systems in the world and reflected in international conventions121 or apply those 'conflict rules which are generally followed in international arbitrations of the kind under consideration'.122 Even though the ML follows the modern trend in international doctrine and does not require the arbitrators to apply the conflict-of-laws rules of the seat of the arbitration123 the approach is criticized for being too conservative and old-fashioned as it still requires the arbitrators to link their determination of the applicable law to a set of conflict-of-laws rules.124

The Dutch legislature has reacted to this criticism. Similar to the liberal French law on international arbitration,125 Art. 1054 Sec. 2 2nd sentence of the new Dutch Arbitration Act126 leaves room for the so-called direct method (voie directe)127 in that the tribunal may decide the dispute according to the 499 rules of law 'which it considers appropriate'. This allows the arbitrators to adopt a flexible approach in the determination of the applicable law without having recourse to conflict-of-laws rules,128 be it because all possible conflict-of-laws systems lead to the application of the same law,129 which resembles the comparative approach outlined above, or simply because the arbitrators consider a certain legal system as particularly appropriate for a 'fair and reasonable'130 solution of the case before them.

The different approaches taken by the legislatures and the drafters of the ML reflect the core problem of conflict-of-laws issues in international economic arbitration. Conflict-of-laws rules for international arbitrators have to provide the parties with a maximum degree of predictability and certainty:

'The freedom [granted to international arbitrators in the determination of the applicable law] has been useful in some cases. However, it has also led to some unpredictability. With the growing use of international arbitration this uncertainty has become a matter of concern to parties. They see no attraction in unpredictable conflict-of-laws rules. They need some degree of certainty as to the law applicable, when drafting their contracts, when seeking a friendly settlement of their dispute, and when resorting to arbitration. They fear a discretionary choice of law by arbitrators, particularly when they know that in comparable situations arbitrators have relied on certain choice-of-law rules. Even arbitrators seem sometimes to have regretted the existing uncertainty.'131

At the same time conflict-of-laws rules for international arbitrators must ensure the flexibility which is required to solve complicated conflict-of-laws problems in transnational economic transactions. The lack of a lex fori for international arbitrations and with it of a predetermined set of conflict-of-laws rules, the 500 strict distinction between a decision according to the rules of law and as amiable compositeur,132 and the insulation of the arbitrator's application of the law from any judicial review133 seem to require a restriction of the arbitrators' freedom to determine the applicable law. The efforts of international arbitrators to be guided, more than the state court judge, by practical considerations such as the underlying economic objectives of the contract in dispute,134 the legitimate expectations and interests of the parties135 - especially in upholding the validity of the contract136 and the possible consequences of their choice of law decision for the outcome of the case137 - require that the arbitrators are freed from the constraints of domestic conflict-of-laws systems.

Viewed against this practical background, the approach of the Swiss legislature seems to be preferable. It provides the arbitrators with a precise and less subjective criterion for the determination of the applicable law than does the voie directe, without forcing the tribunal to apply a prefabricated set of conflict-of-laws rules which may be totally inappropriate to deal with applicable law issues arising in complex international transactions.

In fact, the practical difference between the Swiss approach on one side and the ML and new Dutch law on the other side is only marginal.138 In many cases international arbitrators need not make a final determination of the applicable conflict-of-laws rules because those which have a connection to the case all lead to the application of the same legal system. Also, considerations of conflict-of-laws become moot if the conflict-of-laws rules which bear a connection to the dispute lead to the application of different systems of domestic laws which all lead to the same result. If the arbitrators have to make a conflict-of-laws decision, the voie directe of the new Dutch law does not open the door for the 'subjective attitude of the arbitrators'139 or allow them to 'disregard any rules of conflict-of-laws to freely choose what is in its sole discretion: the proper law of the contract'.140 Irrespective of the structure of the underlying conflict-of-laws rule - whether employing the 'closest connection'-criterion, the direct or indirect method - the arbitrators, in determining the applicable law, do not operate in a legal vacuum or have limitless discretion without any normative underpinning.141 As long as the arbitrators are not authorized to render an award as amiables compositeurs,142 they have to make a determination of the applicable law which convinces the losing party. This follows from the principles of predictability, objectivity and harmony of decisions which are inherent to both international arbitration and international conflicts of law. All of these principles require the arbitrators to base their conflict-of-laws decision on firm and established legal principles which are rooted in the long-standing doctrine of international conflict-of-laws and not on some vague and diffuse discretionary considerations.143 The Dutch conflict rule does not force the arbitrators to feel bound by a particular national System of conflict-of-laws, thus favoring the comparative approach that counsel and 502 arbitrators usually follow in determining the applicable law even if the applicable conflict-of-laws rule allows the voie directe.144 The arbitrators may hence find inspiration in domestic conflict-of-laws systems145 but not according to their free discretion.146 Rather, the arbitrators have to make a selection of choice of law principles which they are able to justify before both parties. This will lead them to apply only those principles which are generally accepted in international conflict-of-laws, thus leading to the same result as the direct method or the Swiss approach. Consequently, in international arbitral practice, the reasons which lead arbitrators to select the appropriate applicable law are similar to the connecting factors used in conflict-of-laws rules.147 This predictability of the choice of the applicable law is also in the strong interests of the parties. Taking account of the legitimate interests of the parties constitutes a determinative value for every decision of the arbitral tribunal.148 Contrary to A. Bucher,149 the direct method does not relieve the arbitrators from their burden to give reasons for their decision. To the contrary, one may even say that the direct method requires them to pay more attention to the giving of reasons for their determination of the applicable law than would be necessary in case of reference to a concrete conflict-of-laws rule. Given that the arbitrators' obligation to give reasons for their decision in the award exerts a certain pressure on the tribunal to enter into a careful consideration of the choice of law problem, the obligation to give reasons for their decision is nothing but a choice of law rule.150 Advocating a complete and unlimited freedom of the arbitrators in the choice of the applicable law also neglects such important indirect 'social' sanctions as possible damage to the arbitrators' reputation caused by untenable decisions and resulting in less future appointments.151 Finally, the arbitrators' procedural obligation to render an enforceable award serves as an additional safeguard to ensure a reasonable degree of diligence in the determination of the applicable law.152

In addition, the conflict-of-laws rule contained in Art. 187 Sec. 1 of the Swiss SIPL reiterates a well-known and generally accepted principle of conflict-of-laws. The principle of the 'closest connection' employed by the new Swiss arbitration law153 is known in almost all legal systems154 ('engste Verbindung',155 'stärkste Verbindung',156 'closest and most real connection',157 'most significant relationship',158 'liens [rapports] les plus étroits'159 ) which consequently also applies in international economic arbitrations.160 Taken alone, this criterion is a 'non-rule' which is generally regarded as not being able to lead directly to the applicable law without 504 reference to some specific connecting factors.161 There are, however, instances where international arbitrators did resolve the applicable law question before them solely on the basis of the 'non-rule'. One of those instances is reflected in the ICC Award No. 5717:

'In complex international relationships such as that under review, a widely accepted choice of law principle in most jurisdictions . . . is the center of gravity, or the connection test. Under this test, the arbitrator selects the substantive law of the jurisdiction that has the greatest connection with the dispute . . .

It is evident that Swiss law is the neutral system of law with the greatest connection both with the relationship between the parties and with their present dispute. The parties' contractual relationship is governed by a contract concluded by the parties in Switzerland. The Claimant demands release of the documents stored in the Bank ABC in Geneva, under a contract with the bank governed by Swiss law. The payment of commissions was to have been made in defendant's Swiss bank account, according to the relevant agreements. Compared to these connections, connections to any one of the other relevant jurisdictions are considerably less significant.'162

In most cases, however, the 'closest connection' criterion merely serves as a starting point and is required to be supplemented by concrete and workable principles. It would, however, be dangerous to deduce from this a complete discretion the arbitrators have in the determination of these principles.163 Rather, the arbitrators have to take a comparative approach by referring back to the list of standardized criteria contained in international Conventions which represent a comparative ratio scripta of choice of law principles even if they are not yet in force.164 They may also refer back to national systems of 505 conflict-of-laws.165 In fact, this comparative technique is followed by most arbitrators in practice even if they purport not to apply any particular choice of law rule. This is exemplified in the statements of two arbitrators in ICC arbitrations:

'The arbitral tribunal does not deem it necessary in this to decide on a specific rule of conflict to designate the proper law of the contract in view of the fact that most major rules in some form or another point to the place of the characteristic or dominant work and that in the opinion of the arbitral tribunal there can be no doubt that the dominant or characteristic work performed under the agreement was performed in Georgia, USA'.166

'Le Tribunal arbitral jouit donc d'un large pouvoir d'appréciation dans le choix du droit applicable, voir d'un pouvoir discrétionnaire . . .

Les règles de DIP suisses, françaises et yougoslaves se réfèrent aujourd'hui toutes à des critères semblables pour rechercher le droit applicable à une obligation contractuelle. Il s' agit tout d' abord de déterminer la prestation caractéristique du ou des contrats à examiner puis de rechercher avec quel territoire cette prestation a le lien le plus étroit ou encore pour reprendre une expression significative du Tribunal Fédéral suisse de localiser le "centre de gravité" du contrat. C'est à cette solution que se rallie aussi la Convention européenne sur la loi applicable aux obligations contractuelles ouverte à la signature des pays membres de la Communauté à Rome le 19 juin 1980.'167

The new Swiss law signals to the parties that the arbitrators will apply these general principles of international private law and relieves the parties from the burden of having to enter into complicated and time-consuming disputes on the 'cumulative approach' which the arbitrators should take in the determination of the applicable law.168

The understandable effort to provide parties and arbitrators with clear and predictable criteria for the determination of the applicable law explains that Art. 4 Sec. 2 of the ZuArbR obligates the arbitral tribunal to apply the conflict-of- 506 laws rules of the new Swiss SIPL. The Zurich Chamber of Commerce thus follows a recommendation given in Swiss legal doctrine to have the arbitrators apply the conflict-of-laws rules of the Swiss situs.169 Lalive contends that the Chamber of Commerce as a private cantonal institution may not substitute itself for the federal legislature and adopt a conflict rule different from and contrary to that enacted in Art. 187 SIPL.170 In his view, inclusion of the ZuArbR in the contract of the parties can hardly be regarded as a deliberate choice of the Swiss conflict-of-laws rules and even if so, the Zurich Chamber of Commerce cannot impose on the international arbitrator a different solution than that taken by the Swiss legislature. For these reasons, Lalive recommends that the international arbitrator, sitting in Zurich under the Chamber of Commerce Rules should disregard Art. 4 Sec. 2 and apply the special federal conflict-of-laws rule of Art. 187 SIPL instead.171 This view seems to neglect the special character of the conflict-of-laws rule contained in the Swiss act which, just as all the other provisions of the new Act, tries to give maximum room for the autonomy of the parties in order to do justice to the specificity of international economic arbitration. Due to the lack of a lex fori, the application of the conflict-of-laws rules of the tribunal's seat is not mandatory. The reference to the rules of the SIPL contained in the ZuArbR which the parties include in their contract can be regarded as a choice of the parties to apply the Swiss conflict-of-laws. The parties' designation of the choice of law rules to be applied by the arbitrators may be regarded as an indirect choice of law. The admissibility of such an indirect choice of law is acknowledged in international doctrine172 and has to be recognized under Art. 187 Sec. 1 SIPL.173 This approach may be impracticable and illogical as the parties' choice does not create the necessary certainty as to the applicable substantive law which every choice of law decisions should provide. The parties have no certainty that the tribunal will actually apply the choice of law rule in the sense anticipated by them at the time of the conclusion of the agreement.174 Leaving aside these practical considerations, there is nothing to prevent the parties from this kind of indirect choice of law. Even if one is of the opinion that Art. 187 Sec. 1 SIPL concerns only the direct choice of law, Art. 4 ZuArbR does not violate the Statute. Given the liberal attitude of the new law, the choice of law rule contained in Art. 187 Sec. 1 must be deemed to be non-mandatory.175 If the 507 legislature allows the parties to free the arbitrators from the constraints of a domestic law176 then, a contrario, the parties must also be allowed to authorize the tribunal to decide according to the rules which a Swiss court would apply in deciding their case.177 However, the international orientation of the ZuArbR requires that the sweeping reference to the rules of the SIPL excludes all those norms which contravene the task of an international arbitrator. This is true for all those norms which deal with the special relationship of foreign law and Swiss ordre public.178 There is common agreement in international doctrine that contrary to the courts at the seat of the arbitration, the international arbitrator is no guardian of the seat's broad ordre public but is only bound to apply the restricted notion of ordre public international.179 One must assume that the ZuArbR as a modern set of arbitration rules do not intend to equate the function of an international arbitrator with that of a Swiss court judge. Instead, the reference in Art. 4 Sec. 2 is merely intended to provide the arbitrators and parties with a workable and predictable framework for the determination of the applicable law which conforms with the modern trends in international private law. This is true for Art. 117 et seq. SIPL which provide modern and concrete criteria for the determination of the applicable law. Art. 4 Sec. 3 ZuArbR reflects that the application of the rules of the Swiss SIPL is no absolute dogma.

The typification of the choice of law criteria evidenced in international conflict-of-laws statutes and conventions leads to a minimum amount of legal certainty and predictability in the determination of the proper law of the contract which is necessary in international economic arbitration. Ultimately, every arbitrator will imperceptibly be guided by his personal experience and the choice of law principles of his legal background.180 Furthermore, considerations of the applicable law are frequently influenced by other factors such as the possible application of lois d'application immédiate.181 This uncertainty is no particularity of international arbitration. State court judges are rarely able to render consistent and predictable decisions on the determination of the 508 proper law of the contract.182 International conflict-of-laws will always remain an open system which leaves room for the influence of domestic notions, habits and doctrines of those who are called upon to decide on the law applicable to a complex contractual relationship.183 In international arbitration much more than in domestic courts this decision is rendered by experienced international practitioners who offer greater assurance for a fair and equitable determination of the applicable law184 and the selection of that law which is best suited to provide an acceptable resolution for the parties' conflict.185

The above analysis of modern arbitral practice also hints at another main function of the conflict-of laws rules contained in the modern arbitration laws. They are intended to clarify that the arbitrators are not ipso jure required to apply the conflict-of-laws system of the seat of the arbitration186 and put an 509 end to the long-lasting187 dispute which has evolved around this question in the past decades.

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In complex international economic arbitrations, huge amounts of money, sometimes amounting to the annual budget of a small sovereign state, can be at stake294 and the proceedings, depending on the legal or factual complexity of the case, can sometimes last over several years. Interest claims thus play

an important, albeit frequently underestimated, role in every international arbitration. In an arbitration involving a claim of US$ 5 Million and lasting over a period of two years, the respondent may have to pay interest amounting to US$ 900,000 if the interest rate is fixed at LABOR plus 1%. Practice has shown that the arbitration may take so long that the interest claim is finally twice as high as the main claim.295 However, the problem of interest adjudication has a significance which goes well beyond the individual case which is before the arbitral tribunal. Throughout this study, we have repeatedly emphasized the danger of dilatory tactics of the losing party which have increased considerably in recent years. As far as interest is concerned, delay in the adjudication of the principal claim may have the effect of a "forced taking of credit" by the respondent to the disadvantage of the claimant which, given the huge amounts claimed, might help the defendant to save considerable amounts of money. This general phenomenon was already acknowledged in the legislative materials of the German Civil Code.296 If the arbitrators are constrained, either by the relevant applicable law or by custom and accepted practice, to award interest at a level inferior to full commercial rates, a defendant has little incentive to refrain from these tactics and proceed with the arbitration speedily so as to discharge his ultimate obligation as early as possible.297 If, however, the defendant knows that the arbitrators have the power and authority to award interest at full commercial rates, this psychological aspect may serve as an effective means to deter parties from using dilatory or obstructive tactics during the arbitral procedure.298 This important "preventive" function of statutory provisions on interest is generally acknowledged and should also be recognized in the discussion on awarding interest in international economic arbitration. Apart from an efficient structuring of the arbitral procedure299 and the consideration of the parties' procedural conduct in the decision on costs300 the legal treatment of interest adjudication may prove to be a very important way to avoid long delays in international arbitration.301 In spite of the importance of the subject matter, very few arbitration laws provide an express provision on interest adjudication.302 Also, the problem

does not appear to have yet received a satisfactory solution in arbitral practice.303

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In international economic relations, the amount of interest claimed by the creditor cannot be limited to the statutory314 interest rates since theses rates usually do not conform with commercial realities. Yet, many arbitrators confine themselves to the examination and application of statutory rates of interests without entering into a detailed analysis of the relationship of this rate with the circumstances of the case, especially as to its commercial adequacy.315

Sometimes, the application of these rates is influenced by overriding principles of law. In the LIAMCO arbitration, the sole arbitrator refused to award interest of 12% as demanded by the claimant (which would have been commercially sound) and applied instead the rate of 5% provided for by the applicable Libyan Civil Code for commercial matters since this rate could not come into conflict with the islamic riba principle which forbids interest rates as an unjustified and usurious means of exploitation.316

Conceptionally, however, interest is an item of damage intended as compensation for the temporary withholding of money, and its measure is the cost of such deprivation.317 The damage-oriented view of interest claims is also acknowledged in many legal systems318 and has recently been confirmed in the ICSID Award Asian Agricultural Products Ltd. (AAPL) v. Republic of Sri Lanka.319 Even in common law, the rule that interest is not recoverable as

general damages for failure to pay money on time is a relic established by a long-since outdated decision of the Kings Bench in 1829320 that has no place in a modern system of commercial law.321 The link between interest and damages has a long-standing tradition. Under Roman law, the taking of interest was prohibited. However, the creditor had an "interest" in the prompt payment of a sum of money due from his debtor. If payment was delayed, the creditor could claim damages, or rather, a conventional penalty from his debtor.322 The prohibition to demand interest contained in canon law of the Middle Ages was circumvented by relying on the possible quality of interest as damages.323 A reason why international arbitrators do not take account of this fact may be that, with respect to lost profits, they tend to be rather conservative.324 If, however, the legitimate interests and the commercial realities are to be the major guidelines for the international arbitrators' decision on the merits, they cannot neglect the impact of the damage-oriented view in the field of interest adjudication. In the case of merchants and other commercial men who have claims against each other which are not duly paid, one can assume prima facie325 that rather than losing return on investments during the relevant period326 they will have to borrow substitute funds for the period of delayed payment at the rate which is usually charged for unsecured short-term credits in the country where the creditor has his place of business.327 This principle

has also been acknowledged in the UNIDROIT draft Principles For International Commercial Contracts:

"If a party does not pay off a monetary debt when it falls due, the aggrieved party may [without having to justify any loss] ask for interest upon that sum [from the date of maturity or notice, by application of Article 6.4.2].

(2) The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the due place of payment; in the absence of such rate, the rate fixed by the law of the State in which money the payment has to be made."328

Tax reasons usually force traders to operate their business with a high credit line and low liquidity. This may be regarded as an empirical rule of international commerce and trade.329 The creditor may thus benefit from an "abstract" method of quantifying the loss which the payment of damages is intended to cover330 and he therefore does not have to prove that credit was actually taken for the sum in dispute.331 The application of this principle is exemplified in the ICC Award No. 3820 where the sole arbitrator awarded interest with the following reasoning:

"Claimant has demanded 13% interest per annum on [the sum awarded] as from 5th February 1979. The defendants have not opposed this part of the claim. Inasmuch as an allowance for interest is itself justified because payment was not made on the agreed date and because the rate of interest claimed was not unusual in international trade in the period concerned, this part of the claim is allowable as well.332

However, the creditor may not pass the costs of his bad credit standing and hence his unforeseeably high credit costs on to the debtor. Again, the empirical rule provides sufficient safeguard in that it assumes that the debtor takes credit

only to the costs usually charged to creditors with an average credit standing.333 Only these costs are foreseeable for the debtor334 and are covered by the scope of the liability for damages.335 If the currency of the contract and the domestic currency of the creditor are not identical, the interest damage has to be computed on the basis of the amount due in the creditor's local currency since there is a presumption based on commercial experience that the creditor will upon payment of the sum due, change it into his local currency in due course.336 To avoid an unjust enrichment of the creditor337 the tribunal always has to check whether the level of compensation awarded extends to the credit costs or if the costs to be reimbursed cover all or at least parts of the credit costs.338 This is expression of the general rule that the arbitrators have to take due account of all pertinent circumstances in determining the reasonableness of the rate of interest, such as the nature of the facts generating the damage, the knowledge that the defaulting party could have had of the financial consequences of its default for the other party, the rates in effect on

the markets concerned and the rate of inflation.339 In spite of this necessity to take into account the special circumstances of the case, the parties and arbitrators will usually seek guidance from some easily accessible and reliable financial data which reflect the borrowing conditions on financial markets such as LIBOR340 , FIBOR341 , the American Prime Rate342 , the Eurodollar interest rate343 or the official discount rate at the seat of the creditor.344 As

most of these data reflect credit costs for inter-bank loans, they have to be increased slightly in order to reflect accurately the credit costs for private parties. The debtor may, of course, force the creditor to refrain from relying on this prima facie rule and require him to prove his damage in a concrete way provided that this damage remains within the limits of the doctrine of foreseeability. The creditor may also claim a higher rate of interest if he proves that the non-payment has caused him a greater loss than the average credit costs.345

Focusing on the inherent function of interest adjudication to compensate for the damage caused by the withholding of the sum due also helps to overcome the highly disputed problem of compound interest.346 The prohibition to charge compound interest (Anatozismus, Anatocisme, "Anatocism") belongs to the common core of most jurisdictions and can be traced back to the prohibition to charge interest under canon law and to the multiple limitations on interest rates (laesio enormis, usury, rate ceilings, taux d'usure). However, the principle no longer conforms with the realities of modern commercial life. It is the usual commercial practice that banks, in some way or another, charge compound interest to finance complex credit facilities or at least apply a method of computing interest which has the same effect as charging compound interest.347 Consequently, these costs which the creditor incurs by taking out

credit during the period of non-payment are a direct consequence of the nonpayment of compensation and must therefore be awarded by the arbitral tribunal under the same conditions as ordinary interest claims.348 Given that the practice of banks varies as to the exact method of compound interest charge, especially if the sum outstanding is calculated on the basis of continued capitalization of interest with quarterly, half-year or yearly rests, the claimant may not rely on a prima facie rule as to the amount of compound interest but has to provide the tribunal with detailed evidence substantiating his damages caused by the bank's charging of compound interest.349 A major obstacle against awarding compound interest in international arbitration is usually seen in the prohibition to charge compound interest contained in many domestic laws.350 Contrary to Langen,351 the commercial realities of contemporary economic relations and the damage-oriented view of the interest problem reveal that the prohibition of compound interest may no longer be regarded as a general principle of transnational law. Even the domestic laws that prohibit compound interest provide for an exception from this rule if the compound interest is part of consequential damage.352 Also, the erosion of the principle is reflected in the new German Consumer Credit Act of December 17, 1990 which expressly allows the creditor to charge interest as an item of damage for default on interest on arrears to be paid by the consumer, albeit limited to the (low) statutory interest rate.353 In this case, one is not dealing with genuine interest but with a special form of damages for default which is payable on any sum due from the debtor under German law354 Prior to the enactment of the Act the German Federal Supreme Court had already acknowledged the de facto "abolition of the prohibition to charge compound interest".355 Given these developments in commercial practice and domestic law, one might even go one step further and state that the provision of domestic law prohibiting