Ole Lando

This chapter deals with the law applicable to the merits of an international commercial dispute before an arbitrator. It treats the rules and practices of arbitral tribunals, mostly those of the Western countries, and the impact, if any, which the UNCITRAL Model Law on International Commercial Arbitration (hereinafter the Model Law)1 will have on these rules and practices.

1. Most international cases are taken to national tribunals. The parties, however, are free to choose the seat of the arbitration, and in many cases they agree to bring their dispute before a tribunal of a national arbitration institution. The institution selects the arbitrator or, if the tribunal is to be collegiate, the chairman of the tribunal. The selection is generally made from a panel of domestic arbitrators.2 The proceedings are conducted under the arbitration rules of the institution and supplemented with the rules of the domestic law of arbitration and civil procedure.3

Parties which do not resort to institutional arbitration may establish a national arbitration ad hoc. They appoint the arbitrator or choose a court or other national authority which is to appoint the arbitrator or the chairman of the tribunal. Failing an agreement to the contrary, the tribunal will sit in the 130 country of the arbitrator or Chairman, and the proceedings will be conducted under the rules of procedure of that country.

2. Reference is increasingly being made to non-national arbitration. The parties agree to entrust an international body such as the Court of Arbitration of the International Chamber of Commerce with the choice of the arbitrator or the chairman of the tribunal. The institution or the arbitrator selects the seat of the tribunal. The tribunal applies the arbitration rules of the institution but is not bound to apply the rules of procedure of the place of arbitration. Nor is it obliged to apply its conflict-of-law rules or its rules on the suitability of the dispute for arbitration. The parties may also decide that an ad hoc arbitration be referred to a non-national tribunal. An international institution such as the Permanent Court of Arbitration at the Hague may then be called upon to select the arbitrator. The arbitrator will apply the rules of procedure agreed upon by the parties. These may be the Arbitration Rules of the United Nations Commission an International Trade Law (UNCITRAL).4

A non-national arbitration is often chosen because the parties wish to have the case decided by a neutral tribunal. In the absence of such an agreement, the plaintiff will bring an action before a court in the defendant's country. The court is expected to be impartial, however, the case is tried in the defendant's language and according to the procedure of his country. In order to prevent the defendant from having the advantage of "playing at home", the parties may refer their dispute to a court or the national arbitration institution of a "neutral" third country. By doing so, however, they often cannot frame the proceedings as they wish. They submit to proceedings and often to substantive rules which are alien to both of them. Neutrality and freedom may be obtained by selecting a non-national arbitral tribunal.5

The situations described are typical cases. It is for the parties to determine the character of the tribunal; they may decide that it shall have some traits of a national and some of a non-national arbitration. Although the arbitrator has been selected from a certain country and the seat of arbitration has been placed in that same country, the parties may want him to apply an autonomous set of procedural rules or conflict-of-law rules. Arbitral tribunals of the ICC have sometimes acted in some respects as national ones, applying, for instance, the conflict-of-law rules of the forum country.6

Non-national arbitration is not unbound by national law. The parties may request a court of the forum country to take the necessary measures to get the arbitration going, to decide upon an arbitrator's partiality, to terminate his mandate, to replace him, to determine the jurisdiction of an arbitral tribunal, etc. The court will decide these issues in accordance with the law of the forum 131 and if the court's ruling is preceded by a ruling of the arbitrator, he will have to take the forum law into consideration.

However, a non-national arbitrator is and should be unbound by all rules of the forum which are not suitable for the conduct of an international arbitration in a neutral country. Thus he should not be chained to the forum's specific choice-of-law rules and substantive law rules.

A country which enacts the Model Law will apply its rules to international arbitrations taking place an its territory7 regardless of whether they are national or non-national. Under the Law the help and supervision of the Courts may be requested in the matters mentioned above8 and its rules an the setting aside of an award will apply.9

At the Same time, the demands of parties who wish the arbitration to be non-national will be satisfied in most respects. The arbitrator will not be tied to the rules of procedure of the forum country unless the parties direct him to follow these rules.10 He will not be bound by the conflict-of-law rules of the forum.11 Article 34 (2)(b) of the Model Law Claims obedience to the public policy of the forum;12 however, this provision will probably be interpreted narrowly.13 The dispute will be governed by the principles of due process of law and by the basic ethical rules governing the validity of contracts such as legal rules by which contracts obtained by fraud or corruption are void. They belong to the common core of the legal systems which are part of international public policy (see infra, Section IV). The economic and political laws of the forum country which form part of its public policy will, in most cases, not claim to be applied to contracts which have no connection with the forum country.

However, under Article 34 (2)(b)ii), the arbitrator will be bound by the rules of the forum on suitability for arbitration also in cases which have no connection with the forum country.14 This is a regrettable solution. It would imply, for instance, that the arbitrator would have to abstain from hearing a case involving rules an restrictive trade practices if, under the law of the forum, such disputes are not capable of settlement by arbitration even though they are arbitrable under the laws of the countries connected with the dispute. The parties may, of course, avoid selecting a country as the seat of arbitration if the courts of that country are known to enforce their own laws on suitability for arbitration in such cases. The seat of arbitration, however, is not always chosen by the parties; it is sometimes chosen by an institution which may not be aware of the laws in question. One must hope that the courts will limit the scope of specific rules on suitability for arbitration to disputes which have an appropriate connection with the forum country. On the other hand, the rules on suitability 132 for arbitration of a country will often have to be taken into account if enforcement of the award is likely to be sought in that country or if it has a close connection with the case (see infra, Section IV).

Many countries, including the United Kingdom, have no statutes dealing with the law to be applied by an arbitrator to the merits of the dispute. In such a case, it is generally understood that the arbitrator will apply the choice-of-law rules of the forum country.

In Europe the most prominent provision on this issue is Article VII of the European Convention on Commercial Arbitration of 21 April 1961, which reads as follows:

The European Convention has been ratified by at least seventeen States in East and West.15 Article VII has had a considerable impact upon later texts. Article 38 of the Rules of Arbitration of the United Nations Economic Commission for Europe has an identical provision and Article VII (4)(a) of the Arbitration Rules for the Economic Commission for Asia and the Far East embodies an almost identical rule. Article 33 of the Arbitration Rules of the United Nations Commission on International Trade Law (the UNCITRAL Rules)16 and Article 13 (3)-(5) of the Arbitration rules (1975) of the International Chamber of Commerce17 have very similar texts.

The UNCITRAL Model Law provides in Article 28 that:

On the whole, the Conventions, their followers and the Model Law are in agreement: The parties are free to choose the applicable law. In the absence of a choice by the parties the arbitrator applies the law designated by the choice-of-law rules which he considers applicable. The parties may authorise the courts to decide the case ex aequo et bono. The arbitration must always obey the terms of the contract and take into account the relevant trade usages.

The major differences between the texts are the following: The Model Law will allow the parties to choose the rules of law applicable to the substance of the dispute. They do not have to choose a national legal system. This is a concession to the advocates of the lex mercatoria and other non-national sources of law (on this subject, see infra, Section III). Furthermore, the texts endorse agreements on amiable composition which so far have not been accepted in all countries. The European Convention and the UNCITRAL Rules require that the arbitrator be permitted to act as amible compositeur under the law applicable to the arbitration. The ICC Rules and the Model Law, which is intended to be enacted as a statute, do not contain this requirement.

Arbitration is secret and the awards do not have the authority of precedents. Nevertheless, the manner in which the arbitrators have decided a dispute and used the freedom granted to them is regarded as valuable knowledge. The psychological factors which lend persuasive authority to precedents also operate in the case of arbitral awards. Faced with a problem, one wants to know how others have acted in similar situations, and one tends to copy them.18 Thus a number of awards have been published19 and some are passed from hand to hand.

The awards which have been published show that the arbitrators of Western countries have made extensive use of their freedom. They have applied a variety of methods and rules when deciding which law to apply to on international contract. These methods will be described in Section II.

Today many contracts contain clauses which expressly submit them to the law of a certain country. The reported cases show that the arbitrators invariably apply the law selected by the parties.20 Some do so without reference to any national conflict-of-law rules.21 Other awards find an authorisation of the choice of law in the conventions or the conflict-of-law rules of a specific country.22

No case is known in which an arbitrator has set aside the parties' express choice of law on the ground of lack of connection with the intended legal system.23 Several awards uphold the choice of a law unconnected with the contract.24 In these cases it appears that the parties often want a neutral or well developed law to apply. Choice-of-law clauses which are made with an evasive intention and by which the parties have committed what the French call "fraude à la loi" have not been found in arbitration cases.25

By giving effect to the parties' choice of law, the arbitrators have acted like the courts of most countries. The parties' freedom to choose the law applicable to their contract is so widely accepted among the nations of the world that it must be said to be "a general principle of law recognized by civilized nations".26

The cases involving an implied choice of law fall into two categories. One is where the intention is "demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case".27 The parties, for instance, have used a contract formula current in a particular country; they have chosen an arbitration institution located in the same country, which is also the country of the place of performance of the contract. In such cases there is a tacit choice of law.

The other category includes cases where the facts do not sustain a tacit choice of law but where the arbitrator, like the courts in some countries, invokes the presumed intention of the parties in support of a choice of law he has made.28 This will be dealt with infra, under II.

An important and much debated question is whether the fact that the parties 135 have chosen an arbitrator or seat of arbitration in a certain country is to be regarded as a tacit choice of the law of the nationality of the arbitrator or of the seat of arbitration.

Often the parties have chosen neither the country in which arbitration takes place nor the nationality of the arbitrator. Many, if not most, references brought to the ICC Court of Arbitration will not have any allegiance to a certain country. The ICC Court of Arbitration will ask the National Committee of the ICC in a country to which neither party belongs to appoint the arbitrator or the president. The Court also selects a "neutral" country as the place of arbitration. As mentioned above, the selection of a neutral arbitrator and neutral place of arbitration has great advantages in international commercial arbitration. However, the place of arbitration and the nationality of the arbitrator have no connection with the dispute.

The same may apply to a non-national arbitration when the parties have chosen the arbitrator and the seat of the tribunal. Imagine a British and a Polish party who have referred their dispute to arbitration under the UNCITRAL Rules. They have chosen an arbitrator from Malmö in Sweden. After his appointment the parties have agreed to conduct the reference in Copenhagen mainly because the city is conveniently located for all persons involved. There is no reason why this reference should be governed by Swedish or Danish law.

If the case is tried by a national arbitral tribunal, the answer may be different. This is shown by court decisions which have dealt with the efhect of the parties' choice of a national tribunal upon the law governing the merits of the dispute.

English courts have held that an agreement to submit to arbitration in a particular country is evidence of an intention to apply the law of that country. In most cases this has led to the application of English law.29 In two leading cases dating from the end of the nineteenth and the beginning of the twentieth century, submission to arbitration in England led the English court to uphold an arbitration clause which was valid by English law, but invalid according to Scots and Jersey law, respectively, which would have been applied in the absence of an effective choice of law.30 However, in 1970 the House of Lords held that a contract made in France between a French shipowner and a Tunisian charterer for the transport of oil from one Tunisian port to another, with payment to be made in France, was governed by French law although the charterparty provided for arbitration in London. The charterparty also contained a clause that it was governed by the law of the flag. This clause, however, was held incapable of application since the ships used for transport of the 350,000 tons of oil were Norwegian, Swedish, French, Liberian and Bulgarian, and all were chartered by the "shipowner". Apart from the arbitration clause, 136 the contract had no other connection with England. Their Lordships agreed that even if the parties had failed to make an express choice of law, the proper law of the contract was French law, the law with which the contract had its closest connection. They also agreed that where the parties had made no express choice of law, the inclusion of an arbitration agreement is evidence of an Intention to apply the law of the place of arbitration, but that such an agreement ". . . should not be treated as giving rise to a conclusive or irresistible inference . . .".31

The French courts have been induced by an arbitration clause to conclude that the parties intended to submit the contract to the law of the chosen forum.32 In one of the leading cases the court was faced with the problem whether the submission to arbitration and to the courts in England constituted a valid choice of English law with the result that the arbitration was valid, whereas it was invalid according to French law which would have been applied in the absence of a valid choice of law. The court held that the submission constituted a tacit and valid choice of English law and upheld the arbitration clause.33

For a long time the courts in West Germany held that a clause submitting to arbitration in a particular country constituted a tacit choice of the law of that country.34 Sometimes other connecting elements or other indications of Intention were taken into account as additional evidence of a choice of law.

Some arbitral awards have gone in the same direction;35 however, an opposite trend is discernible. As mentioned before, parties who choose a neutral place of arbitration may not wish to have the law of the forum applicable to their dispute.36 This is also true when the parties have selected the national arbitration institution of a neutral country. The tribunal of the institution will not consider the parties' choice of the institution as a tacit choice of the substantive law of the forum. The leading Swedish textbook on international arbitration in Sweden which reflects the practices of the Arbitration Institute of the Stockholm Chamber of Commerce does not even mention that a Swedish arbitrator might apply the law of the forum.37

Arbitrators, however, have often applied the law of the forum as the law designated by the parties when other connecting factors, such as the place of business of one of the parties, have also pointed to the forum country.38

The European Convention of 1961 and its followers grant the arbitrator the power to determine the applicable law "failing any indication by the parties as to the applicable law". The Model Law grants him the same power "failing any designation by the parties". An indication is more easily ascertained than a designation, and thus the new terminology seems to indicate that greater demands have been placed an providing evidence of the choice of law by the parties. Given the freedom which the Model Law grants the arbitrator to designate the applicable law in the absence of a choice of law by the parties, the new terminology need not have consequences when a national legal system is to be applied. Even when the parties have not "designated" a certain law, the arbitrator may, by virtue of the choice-of-law rules which he considers applicable, rely an what he believes to be a genuine "indication" of the parties to apply that law.

On the other hand, the increased demand that the parties' choice be evident, may become important when the parties have chosen the lex mercatoria (see Section III below).

Turning to cases where the parties have not indicated the law applicable to the contract, we shall see what the arbitrator is obliged to do under Article VII of the European Convention, Article 28 of the Model Law and other authorities, which law arbitrators have in fact chosen, the reasons for their choices, and finally which choice-of-law rules should apply in the opinion of the present writer.

Article VII of the European Convention an Commercial Arbitration and its followers-one of them being Article 28 of the Model Law-authorise the arbitrator to apply the conflict-of-law rules which he deems applicable. He is not bound to apply the choice-of-law rules of the forum country. Article VII applies to disputes between persons and enterprises having their habitual residence in different States which are parties to the Convention (see Article I (a)). As mentioned before, the rule provided in Article VII has been widely adopted in other texts. To our knowledge, most countries will permit the arbitrator to select the choice-of-law rule which he deems applicable if a rule of the arbitration institution, or other rules adopted by the parties, such as the ICC Rules or the UNCITRAL Rules of 1976, authorise him to do so. He may do so even when the dispute is not governed by the European Convention.39

In other cases not governed by the Convention, it is doubtful whether the arbitrator is bound to apply the choice-of-law rules of the forum. Some authors have asserted that an arbitrator whose mandate is based upon the Submission of the parties is unbound by the choice-of-law rules of any specific country. He may choose the conflict-of-law rules he prefers.40 Others maintain 138 that the arbitrator derives his mandate from the authority of the State in which he conducts the arbitration and that he is bound to follow its choice-of-law rules.41 This is correct in so far as a State has the power to direct the arbitrators acting an its territory to apply a specific set of choice-of-law rules. Some States have in fact obliged arbitrators to apply the rules of the forum country.42 In Western countries, however, the view is gaining ground that the arbitrator should not be bound to apply the same choice-of-law rules which bind the courts. This view has been accepted by the Model Law which, if enacted, will let the arbitrator apply the conflict rules which he considers applicable. Sweden, Switzerland and England are not parties to the European Convention. Nevertheless, Swedish authors maintain that international disputes which are to be decided in Sweden are not necessarily governed by Swedish conflict rules.43 In Switzerland some authors have advocated the freedom of the arbitrator to choose the appropriate conflict rules; the authors of the draft Law on Private International Law have decided to leave the question open.44 In England arbitrators are bound to apply English conflict rules to international disputes which are governed by the rules of the specific case.45 In cases not covered by these rules, a choice of law by the arbitrator cannot be challenged.

Before examining the choice-of-law rules which the international arbitrator should consider applicable, we shall first turn to the arbitral awards.

(a) There are some awards in which the arbitrator has applied the choice-of-law rule of the forum country. This solution is recommended by several authors and by the Institut de droit international (1957 and 1959).46 Some awards apply the conflict rule of the forum without further reflection, others invoke the Institut or other authorities.47 In a few cases the arbitrator has done so because he would not draw upon any other source for an adequate choice-of-law rule.48 Several arbitrators have used other methods.

(b) Writers and courts generally take it for granted that a legal issue can be governed by one law only, and that the choice-of-law rules of one legal system are to be applied. In accordance with this "legal monism", most lawyers would hold that only one conflict-of-laws system, be it the rules of a legal System or of another source, can govern an issue before a court of arbitration. Several arbitrators, however, have not followed this monism. Faced with a choice between two laws - for instance the laws of the parties - the arbitrators have shown that the choice-of-law rules of both laws refer to the application of 139 the substantive rules of one of them. Since they have not disclosed which of the two systems they have applied, one must conclude that both have been applied. Often the arbitrators have also been able to show that the substantive laws of the two systems agreed and that they invoked both.49

Arbitrators who have the freedom to select the choice-of-law rules which they consider applicable cannot be tied to any monism. They must be able to apply two, or more converging conflict-of-laws systems cumulatively. Article VII of the European Convention and Article 28 of the Model Law do not envisage the cumulative application of two or more substantive laws. Though it may seem repugnant to the legal mind to do so, there are no valid legal or moral grounds for criticising such an approach.

In some awards the "general principles" of private international law have been invoked.50 The arbitrator has alleged that there was unanimity among the private international laws of the world or at least among all the major legal systems an this particular issue. This has sometimes been done with some audacity. In a case from 196751 it was stated that it is "in conformity with the constant theory and case law concerning the conflict of laws (. . . that . . .) preference has to be given to the law of the place where the contract has been made, and subsidiarily, to that of the place of performance". This holds true of some legal systems but by no means of all.

In earlier times the courts of several countries, including the English, French and German, relied an the presumed intention of the parties to decide which law to apply. This led to unpredictable solutions as the courts often, but not always, found that the parties would have chosen the law of the forum if they had made a choice of law. This practice has now become rare. Instead, the courts tend to apply the law of the country to which the contract is most closely connected. Many arbitrators do the same.52

(c) Whereas national conflict-of-laws systems have been invoked in the cases above, in other cases reference has been made to international conventions an private international law. For example, the Hague Convention an the Law Applicable to International Sales of Goods (1955) has been invoked. This has occurred even in instances where none of the States connected with the matter adhered to the Convention.53 Reference to this Convention has also been made by the state courts of countries which were not parties to the Convention.54 State courts have also invoked choice-of-law rules in texts which do not have legally binding character, such as draft conventions and draft laws.55 Article VII of the European Convention on Commercial Arbitration and Article 28 (2) of the Model Law permit the arbitrator to make use of such texts.

(d) In several cases the arbitrator has relied an a conflict rule without disclosing the legal system or other source from which it was derived.56 The arbitrator, for instance, has stated that he chose the law of the country in which the contract was made or was to be performed. In most cases it has been easy to find authorities which support the rule chosen by the arbitrator.

(e) In a number of cases the arbitrator has taken a short cut and gone directly to the substantive law, thus avoiding the intricacies of private international law.57

In some of them the arbitrator has compared the substantive rules of the various countries connected with the dispute and found a satisfactory concurrence, i.e., the rules led him to the same outcome.58 In such cases his short cut has been justifiable. Any conceivable conflict rule would have led him to one of the concurring laws.

In other cases the arbitrator has stated that he applied the substantive law of a certain country,59 however, without giving reasons and without revealing whether the laws of other connected countries would have led to the same result. Such a direct leap to the applicable law is tenable in those cases where it is evident that the law chosen is the proper law of the contract, because all or most of the connecting factors point to that law. Where the proper law is not evident, the arbitrator should reveal the conflict rule which he applies.

(f) Sometimes the arbitrator, in addition to invoking a rule of national law, has supported his finding by reference to the lex mercatoria or to the general principles of law.60

In some cases this means that the international trade usages or the prevailing practices of international trade61 have been applied. This reference is in accordance with Article VII (1) of the European Convention and with Article 28 (4) of the Model Law. In these situations the arbitrator need not search for a proper law of the contract.

In other situations the arbitrator has relied exclusively an non-national law. This is dealt with infra in Section III.

The awards reveal a variety of approaches. Some arbitrators apply the choice-of-law rules of existing legal systems, some select conflict rules which have not yet been enacted, and some invent such rules. Others simply leap over the choice-of-law question. The picture is colourful and confusing. Yet one could not expect it to be otherwise.

(a) The cases are decided by arbitrators of different nationalities and legal backgrounds. Their decisions reflect the diversity of approaches to the conflict of laws of contract. Some of the laws provide inflexible and others flexible 141 rules; some rely exclusively or lay the main stress on the place of contracting, some an the place of performance, and some an the place of business of the parties or the party providing the characteristic performance.62

(b) The attitude of many arbitrators to the judicial process resembles that of judges. Others have a more open approach.

Some arbitrators view the law as a perfect and stringent system of rules under which a good lawyer can always find the one and only solution. To apply the law is the same as to apply the theorems of mathematics. In their view this is not only possible, but also desirable. It produces certainty and predictability for the citizen.

On the other hand, there is another school of arbitrators which contests the absolute predictability advanced by the school of legalists.63 In their opinion, no legal system provides definite solutions to all problems. Even the best lawyer in the most highly developed country is often in doubt. Moreover, predictability is only one of several social values. Rules which create certainty and predictability also bring about rigidity. The legal process is not and can never be a mere syllogism. It is above all an effort to reach the most fair and appropriate solution. In this process, which is partly inventive, the arbitrator will have to take the special circumstances of the case into account.64

Although the two schools are contrasted sharply here, when in doubt, even the legalist will seek the equitable and appropriate rule. A clear statutory provision or precedent may bind the inventor to a solution which he finds unfair or inappropriate. The two schools reflect two different attitudes to the legal process. The one cultivates the statute and the precedent. The legalist will always strive to bring the case before him under the proper provision or precedent. The inventor does not cherish the authorities equally. He views the case from its different aspects, weighs up the opposing considerations and makes his choice.

In the civil law countries the law requires judges to be legalists; however, when deciding cases concerning the conflict of laws of contracts, they have often disregarded the rules, and their "disobedience" has frequently been disguised.65 The freedom which arbitrators have in applying the law has left even more room to the inventors. They have used it and have not needed to hide their inventiveness.

(c) Furthermore, the very task of the international arbitrator makes his reasoning and decision-making different from that of the judge.

When giving reasons for the award, the arbitrator has a double concern. As the mandatory of the parties, he must persuade them, especially the losing party, that the award is just. Moreover, he must make sure that the award is enforceable in the country or countries where enforcement may be sought.

This leads many arbitrators to justify their conclusions by referring not only to the law which they would deem applicable to the dispute but also to other laws connected with the parties or the subject-matter of the dispute. The arbitrator will often refer to the law of the unsuccessful party to show that this law 142 confirms his findings. As mentioned above, such a cumulation of rules of the legal systems involved is unobjectionable. On the other hand, it offers little guidance to parties of future disputes and their arbitrators who wish to learn. However, few arbitrators will see any fault in that; they feel no responsibility for the development of a world law of international arbitration

The freedom which the European Convention and the Model Law grant the arbitrator to apply the choice-of-law rule which he considers applicable is beneficial in so far as it frees the international arbitrator from the fetters of the forum law. On the other hand, if the arbitrators themselves do not make an attempt to harmonise their practices, the diversity will continue. It is unlikely that parties to international commercial arbitration cherish this. Parties who do not agree on the application of the lex mercatoria or on awards ex aequo et bono want the arbitrator to take up a legalist attitude to basic issues of the dispute such as the choice of the proper law of the contract. Books, articles and reviews on international commercial arbitration provide a world-wide basis for discussion, and so do the increasing number of published awards. The first signs of attempts at co-ordination are already visible66 and more will follow. It is to be hoped - and seems likely - that the arbitrators will then follow the trend of modern legislations67 and court decisions.68 They have the following characteristics:

(a) The law chosen by the parties governs the contract.69 Only a choice which appears clear from indications in the contract or from the behaviour of the parties counts as a choice of law. Presumed intention is not considered.70

(b) In the absence of a choice of law by the parties, the law with which the contract has its most significant connection will govern.71 This connection is based upon the relevant contracts, notably the place of business or the habitual residence of the parties, and the place of performance.72 The parties' choice of the place of arbitration or the nationality of the arbitrator may also carry weight.

(c) It is to be presumed that the contract has its most significant connection with the country where the party who is to effect the performance which is 143 characteristic of the contract has his place of business.73 Thus sales of movables are presumed to be governed by the law of the seller's place of business, licence contracts by the law of the licensor's place of business, and agency and distributorship contracts by the law of the agent's and the distributor's place of business.

Employment contracts, however, are presumed to be governed by the law of the place of work,74 and contracts relating to immovables by the law of the place where the immovable is situated.75 Other special presumptions for specific contracts exist or may come into existence.

As was pointed out, these rules are presumptions. This means that they do not apply if it appears from the circumstances of the case that the contract has its most significant connection with the law of another country.

Special problems concerning mandatory rules will be dealt with in Section IV

The parties to an international contract sometimes agree not to have their dispute governed by national law. Instead they submit it to the customs and usages of international trade, to the rules of law which are common to all or most of the States engaged in international trade or to those States which are connected with the dispute. Where such common rules are not ascertainable, the arbitrator applies the rule or chooses the solution which appears to him to be the most appropriate and equitable. In doing so, he considers the laws of several legal systems. This judicial process, which is partly an application of legal rules and partly a selective and creative process, is referred to here as application of the lex mercatoria.76

In Continental Europe, arbitrators increasingly apply the lex mercatoria to international disputes.77 Clauses to this effect are often inserted in contracts between a government or government enterprise an the one hand and a private enterprise an the other.78 The government does not wish to submit to the laws of a foreign State. A private party will not wish to have the contract governed by the laws of the foreign government since they may be changed to his dis- 144 advantage after the contract is made. Clauses referring to the lex mercatoria are also found in contracts made between private enterprises.

By choosing the lex mercatoria the parties avoid the technicalities of national legal systems as well as rules which are unfit for international contracts.79 Thus they escape peculiar formalities, short periods of limitation, and some of the difficulties created by domestic laws which are unknown in other countries, for example, the common law rules an consideration and privity of contract. Furthermore, those involved in the proceedings - parties, counsels and arbitrators - plead and argue on an equal footing; nobody has the advantage of having the case pleaded and decided by his own law and nobody has the disadvantage of seeing it governed by a foreign law.

On the Continent and in the common law countries it is still a matter of controversy whether the parties may agree to have their contract governed by the lex mercatoria.80 This question will be dealt with; however, first the existing elements of the lex mercatoria and the judicial process involved when it is applied to the substance of the dispute will be considered.

In international arbitration the lex mercatoria is applied in combination with a national law. Here we shall deal with the case where the lex mercatoria is paramount and no single national law governs the contract. Situations are considered where the mandatory rules of the national law must not be applied but its directory rules are applied to fill the gaps left by the law merchant.81 Although all of the questions raised in such situations are not covered, some of the following observations also cover this combination.

It is not possible to provide an exhaustive list of all elements of the "law merchant".82

This is one important element. The rules of public international law on treaties have been applied to contracts between a government enterprise and a private party. Several provisions of the Vienna Convention an Treaties of 13 May 1969 reflect the common core of legal systems83 and are thus suitable for international contracts. The World Bank Convention of 18 March 1965, which provides for the settlement of investment disputes between States and nationals of 145 other States, provides in Article 42 that, in the absence of a choice of law by the parties, the arbitral tribunal shall, inter alia, resort to such rules of international law as may be applicable.84 Rules of public international law may also be applied to disputes between private enterprises.

The uniform laws which have been adopted for international trade are also important. An example is the Uniform Law an the Sale of Goods of 1964 which has been ratified by some European countries. Its successor, the Convention an Contracts for the International Sale of Goods of 1980 is expected to be adopted by a larger number of countries.

Where the courts of those countries connected with the parties or subject-matter of a dispute would be obliged to apply a uniform law, the arbitrator will be bound to do the same. The expressions "bound to" or "obliged to" etc. are used here although the duty of the arbitrator cannot be enforced by the courts.85 Sometimes the uniform laws may guide the arbitrator as has been the case in several published awards.86

The general principles of law recognised by the commercial nations are an important element of the law merchant,87 for example, the pacta sunt servanda rule and the principle that a party may terminate a contract in the case of a substantial breach by the other party. It is not always easy to ascertain which rules are general principles; however, the possibilities of doing so are improving with the growing volume of literature an comparative law. Arbitrators have been known to make use of the International Encyclopedia of Comparatiae Law to find the general principles of the major legal systems of the world. Furthermore, a comparative analysis of the relevant laws will reveal whether the rules of the various legal systems, though differently formulated, produce the same result. An arbitrator who is faced with a general principle or common solution to the issue will generally be obliged to comply with it.88

Although some authors have conceived the law merchant as universal law, it need not be the same all over the world. The arbitrator will tend to confine his investigations to those legal systems which are connected with the subject-matter of the dispute. Where they have a common rule or rules leading to the same result, the arbitrator will be obliged to follow the common core of these laws even though other legal systems may provide a different solution.89

International organisations (the UN, UNCTAD, the OECD, etc.) have adopted 146 resolutions, recommendations and codes of conduct90 on matters relating to contracts. These measures, which have a non-binding character, often reflect good faith and fair dealing. Mention should also be made of the more ambitious efforts to unify commercial laws. UNIDROIT and the Commission an European Contract Law are in the process of establishing general principles of contract law, the former for all nations of the world, the latter for the Member States of the European Communities. These principles will be published as non-binding rules which, inter alia, will serve as guidelines for international arbitral tribunals.91

The customs and usages of international trade make up another very important element of the concept of the law merchant. The customs and usages of some trades apply both to domestic and to international contracts; others apply only to international relationships. In addition, there are the "codified" customs, for instance, the INCOTERMS, the Uniform Customs and Practices for Documentary Credits and the newly adopted force majeure and hardship clauses issued by the ICC. These customs, usages and contract terms only apply when the parties or their organisations have agreed to apply them. They have, however, provided guidance for the courts and for arbitration even when they have not been chosen by the parties.92

Several standard form contracts have gained international popularity. This applies to the General Conditions for the Supply of Plan and Machinery for Export issued by the Economic Commission for Europe in 1953.93 The same holds true for some standard clauses in contracts which are made individually. The courts have established interpretations of these standard form contracts and clauses and such interpretations can also be found in reported arbitral awards. In cases where the courts of several countries have agreed upon the interpretation of certain clauses, this interpretation will bind the arbitrator. In other cases he may be guided by an interpretation in a particular court decision or in arbitral awards.

Most arbitral awards are not published and are kept secret even from the members of the trade. This is to be regretted because the reporting of arbitral awards is an important element of the law merchant. During the last few decades there has been an increasing tendency to publish arbitral awards.94 147 The cases reported so far display a multitude of approaches which offer the arbitrator useful guidance but do not provide him with the firm hand of settled case law.95 The literature on these cases is already abundant and thus it is hoped that, as more and more awards are published, a dialogue between writers and arbitrators will eventually homogenise the awards.

The law merchant is still a diffuse and fragmented body of law. It will develop with the growth of uniform laws, international trade customs and usages, and with the increasing number of reported awards; however, it will never reach the level of the copious and well-organised national legal systems. This has to be admitted. To do so, however, is not to admit that the lex mercatoria cannot be applied.

The imperfect character of the law merchant makes arbitration something more than the mere application of pre-existing rules. The arbitrator must often seek guidance from sources other than the law merchant, notably from national laws. Sometimes he must invent a new solution, thus acting as a "social engineer". The opponents of the law mercatoria argue that it does not derive its binding force from any State authority and does not provide a sufficiently substantial and solid system. It cannot be called a legal order and therefore it is not suitable as a basis for the settlement of legal disputes.96 Another school of thought (to which the present writer adheres) holds that the binding force of the lex mercatoria does not depend on the fact that it is made and promulgated by State authorities but rather that it is recognised as an autonomous body of rules by State authorities.

The two opposed schools of thought reflect the two different attitudes to the legal process described above.97 The legalists oppose the application of the lex mercatoria; the inventors favour it.

An arbitrator applying the lex mercatoria will act as an inventor more often than one who applies national law.98 Faced with the restricted legal material which the law merchant offers, he must often seek guidance elsewhere, mainly in the various legal systems. When they conflict, he must make a choice or find a new solution, and thus the lex mercatoria often becomes a creative process.

Arbitrators of different nationalities who have applied the lex mercatoria in collegiate arbitral tribunals have not experienced great difficulties in reaching consensus. When the law merchant has been silent and the national laws con- 148 nected with the subject-matter have not led to the same result, few arbitrators have insisted on the solution provided by their own legal system but have sought the most appropriate and equitable solution for the case.

By applying the lex mercatoria, arbitrators may take advantage of their freedom to select a better rule of law, something which the courts cannot do. For instance, the Scandinavian Sale of Goods Act provides that the buyer who wishes to invoke a late delivery of the goods must give notice immediately upon delivery. This rule is not suitable for international sales. Non-Scandinavian buyers are not acquainted with it, and for them it may be a trap. The rule in Article 49 (2) of the Convention an the International Sale of Goods of 1980, under which notice must be given within a reasonable time, offers a better solution.

Most arbitrators are led in the same direction by common ethics and notions of how business should be conducted. Often their intuition has told them the outcome before they have reflected upon the reasons. In their attempt to give reasons they sometimes realise that the issue is governed by a rule which still has to be framed. Even courts sometimes face such situations. Instead of invoking rules of law, Scandinavian courts sometimes refer to the facts which led them to their evaluaiton and conclusion. After stating the facts, they find, for instance, that the defendant's breach of contract was so reckless that he cannot invoke the exemption clause of the contract.99 Whether they are relying an a general rule to the effect that liability for reckless breach cannot be validly excluded by contract or whether this only applies to the special circumstances of the case is not revealed. One cannot expect arbitrators to give more scholarly reasons. Such reasoning will often satisfy the parties for whom the award is made.

Many arbitrations turn upon the interpretation of a contract. Although continental countries have statutory rules an interpretation100 arbitrators seldom invoke them. The interpretation of a contract is generally based upon reason and logic, and they are communal property.

In this way the law merchant is supplemented by the common attitude of arbitrators which furnishes a greater community of understanding. In spite of the common attitude of arbitrators, one would still think that the rich body of a national law would provide more consistent and predictable awards.

In many situations national law will give the parties greater certainty than the lex mercatoria, especially where the parties have agreed to have the contract governed by a national law system and the arbitrator is familiar with the chosen law. In many cases, however, the parties have not chosen the law applicable to the contract, and often it is doubtful which law applies. Although the choice-of-law rules for contracts are becoming more uniform, they still create problems.101 Such a problem arises when the arbitrator has to apply the rules of a system which is foreign to him. The cases show that his difficulties may be considerable102 and that mistakes are not infrequent. The lex mercatoria has the 149 advantage that it does away with the choice-of-law process which many lawyers abhor.103

Even when applying a national law well known to him, the arbitrator may run into difficulties which make his decision less predictable. Some national law rules are made exclusively for domestic relationships and thus are not suitable for cases containing foreign elements. Faced with such rules, the arbitrator is sometimes in a dilemma and must choose between law and equity. In such cases the lex mercatoria may in fact provide more certainty. Where the arbitrator is to decide whether the aggrieved party gave notice of a late delivery of goods in time, the lex mercatoria, as mentioned above, will give the answer provided by Article 49 (2) of the 1980 International Sale of Goods Convention; if the case is to be decided under Danish law, doubt will arise as to whether the Danish courts have reduced their demands for immediate notice when the buyer is a foreigner. In this respect Danish case law seems to be unsettled.104

Some authors who oppose the parties' right to choose the lex mercatoria will permit them to agree an amiable composition or decisions based an equity; however, this is an even more uncertain basis than the lex mercatoria. In spite of common traits, there is a difference between the lex mercatoria and equity. The lex mercatoria obliges the arbitrator to base his decision an the law merchant even when equity might lead to another result.105

Rules which cut off the right of the buyer to bring an action for defects in goods delivered after a certain time may be inappropriate for the delivery of durable goods. When a Scandinavian seller has sold such goods to a German buyer, the arbitrator must find for the seller, if the two-year period of notice under Article 39 of the 1980 Convention had elapsed before notice of the defects was given. He must do so even if it would be more equitable to find for the buyer. The cut-off period under the convention is longer than that of the Scandinavian Sale of Goods Act, section 54, and the German Civil Code, 477.106

From the above it follows that the lex mercatoria is capable of application even though it is an imperfect system. All national legal systems were once imperfect and many still are. To refuse businessmen the right to select the lex mercatoria would be an unwarranted tutelage. As will be pointed out below, the choice of the lex mercatoria need not give the parties any opportunity to evade mandatory rules of law.

In the next section the attitude of some specific legal systems to awards based an the lex mercatoria will be examined. Firstly, with regard to domestic awards, the question arises as to whether the losing party may have the award set aside if the case is decided according to the lex mercatoria. Furthermore, may the successful party have it recognised and enforced? Secondly, we will deal with the arbitrator's duty to consider international public policy and the man- 150 datory provisions of countries closely connected with the subject-matter of the dispute.

Eight Western European countries (Belgium, Austria, Denmark, the Federal Republic of Germany, Finland, France, Italy and Spain) and most of the socialist countries of Eastern Europe have ratified the European Convention of 21 April 1961107 on International Commercial Arbitration. This Convention applies to international arbitration agreements concluded between persons having their residence in different Contracting States and to arbitral procedures and awards based an such agreements.

Article VII (1) of this Convention provides that:

the parties shall be free to determine, by agreement, the law to be applied by the arbitrators to the substance of the dispute. Failing any indication by the parties as to the applicable law, the arbitrators shall apply the proper law under the rule of conflict that the arbitrators deem applicable. In both cases the arbitrators shall take account of the terms of the contract and trade usages.

This provision presupposes that a national law is to be applied to the substance of the dispute. However, under article VII (2), the arbitrators may act as amiables compositeurs if the parties so decide and if they may do so under the law applicable to the arbitration. Since the lex mercatoria will tie the arbitrators to legal rules more than a decision made by an amiable compositeur, this comes close to saying that arbitrators may decide the case on the basis of the lex mercatoria when the parties have so decided and when they are permitted to agree upon an amiable composition under the law applicable to the arbitration.

The European Convention was made to facilitate the recognition and enforcement of arbitral agreements and awards. Whereas it set limits on the right of the Member States to refuse recognition and enforcement of such agreements and awards, it did not prevent Member States from being more liberal, i.e. from going further than the Convention in their recognition and enforcement. This has been done by France.

French authors have eloquently advocated the application of the lex mercatoria108 and their efforts have been fruitful. A government decree of 12 May 1981 has added new provisions on international arbitration to the Code of Civil Procedure. Under Article 1496, the arbitrator applies to the contract those rules of law which the parties have chosen, and when no choice has been made, those which he considers appropriate ("celles qu'il estime appropriées"). This provision extends recognition to French and foreign awards based upon 151 the lex mercatoria or other non-national sources of law even when the parties have not agreed on a decision based upon these sources.109

Swiss and German authors are divided as to whether to allow application of the lex mercatoria.110 I have not found reported cases on the issue. Several authors, including some who declare enmity111 against the lex mercatoria, agree that an award which has been rendered ex aequo et bono may only be set aside if it violates a strong principle of German public policy (ordre public). It is not sufficient that it merely violates mandatory provisions of German law.

In a judgment of 18 November 1982 the Austrian Supreme Court upheld an ICC award made on 26 October 1979 in Vienna an the basis of the lex mercatoria.112 The parties had not agreed on the lex mercatoria nor had they submitted to amiable composition. The case had turned on the question whether the Turkish claimant, who had been the agent of the French defendant and who had marketed the defendant's goods in Turkey, could claim damages for lost commission after having been dismissed by the defendant. The arbitrators could not find themselves able to choose a national law, the application of which was sufficiently compelling, be it Turkish or French. They therefore based their decision on the international lex mercatoria. Applying the principle of good faith and fair dealing, they found that the termination of the contract by the defendant had been unjustified and awarded damages to the claimant for an amount of 800,000 French francs. The Supreme Court found that the application of the lex mercatoria had been justified. It pointed out that the award did not violate mandatory provisions of either Turkish or French law.

Some English writers assert that arbitrators must always apply the law.113 They will not accept awards based upon "equity and good conscience" or on the lex mercatoria. Other authors favour the application of the lex mercatoria.114 It seems that the idea of lex mercatoria as a genuine system of law is still foreign to English 152 arbitrators. Thus it is doubtful as to how English courts will treat agreements to apply awards based upon the lex mercatoria.

In cases where a reasoned award is not required and not given, an English court will not review the legal basis of the award.115

Before 1978 English courts set aside awards based upon "equity";116 however, in 1978 the Court of Appeal upheld an arbitration clause according to which the arbitrators should "not be bound by the strict rules of law but . . . settle any difference referred to them according to an equitable rather than a strictly legal interpretation of the provisions of this contract". The court found this provision "entirely reasonable". It did not oust the jurisdiction of the courts but only removed "technicalities and strict constructions".117 One might ask whether this judgement would also cover a lex mercatoria clause.118

Furthermore, under the Arbitration Act 1979,119 the parties may by an agreement in writing exclude the right to bring questions of law before the courts. They may always make such an exclusion agreement after the dispute has arisen. The parties to an international contract may also do so before the dispute has arisen if they expressly agree to have the dispute governed by a law other than the law of England. It might be asked whether an exclusion agreement would be equally effective if the parties chose to apply the lex mercatoria instead of a foreign law. Would English courts deciding this question be guided by one of the purposes of the Arbitration Act 1979 which was to limit the review by the English courts to the arbitrators' findings of law in international arbitrations?

The United Kingdom has adhered to the Convention of 18 March 1965 on the Settlement of Investment disputes between States and Nationals of Other States.120 Such disputes are to be settled by arbitration. Under Article 42 (1) of the Convention, the arbitral tribunal has to decide disputes in accordance with such rules of law as may be agreed by the parties. The parties are entitled to agree on a non-national law.121 Article 42 (1) also provides that, in the absence of such an agreement, the tribunal shall apply the law of the contracting state which is a party to the dispute (including its rules an the conflict of laws) and such rules of international law as may be applicable. It seems to be generally agreed that the rules of international law refer not only to the rules of public international law but also to what is referred to here as the law merchant.122 Furthermore, it has now been established by an arbitral award rendered under the Convention123 that, in the case of a conflict between the law of a Contracting State and "the rules of international law" the latter rules may be given pref- 153 erence over the former. It is not yet known whether Article 42 of the Convention may have an influence an the general attitude of the English courts to the lex mercatoria.

In the United States the federal courts and most state courts are reluctant to set aside arbitral awards an legal grounds. The Supreme Court of the United States in a dictum that "the interpretation of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation".124 Cases where a federal court has set aside an award for manifest disregard of law are not known. Although the lex mercatoria is foreign also to American arbitrators, it seems unlikely that an agreement by the parties to apply the lex mercatoria or an award based on such an agreement would be challenged by an American court.

1 UNCITRAL Model Law on International Commercial Arbitration as adopted by UNCITRAL on 21 June 1985 . Annex I to UNCITRAL Report.
2 See Stockholm Chamber of Commerce, An Introduction to International Arbitration in Sweden (Stockholm, 1982), p. 7: "So far most arbitrators appointed by the Institute have been of Swedish nationality . . . .
3 Ibid.
4 UNCITRAL Arbitration Rules (UN Publication No. E 77.V.6, New York, 1977) were recommended by the General Assembly for the settlement of international commercial disputes in Resolution 31/98 of 15 Dec. 1976.
5 On the issue of "arbitration unbound" see P. Lalive, "Les Règles de conflit de lois appliquées au fond du litige par l'arbitre international siégeant en Suisse", Rev. Arb. (1976), p. 155; P. Lalive "On the Neutrality of the Arbitrator and the Place of Arbitration", in C. Reymond and E. Bucher (eds.), Swiss Essays on International Arbitration (Zurich 1984), p. 23; J. Paulsson, "Delocalisation of International Commercial Arbitration", 32 ICLQ (1983), p. 53; J. Paulsson "Arbitration Unbound: Award Detached from the Law of its Country of Origin", 30 ICLQ (1981), pp. 358-387; O. Lando, "The Lex Mercatoria in International Commercial Arbitration", 34 ICLQ (1985) p. 747.
6 See Part II of this chapter.
7 Article 1(2).
8 Article 6.
9 Article 34.
10 Article 19.
11 Article 28.
12 Article 34(2)(b)(ii).
13 UNCITRAL Report No. 296.
14 See UNCITRAL Report No. 291 on Article 34(2)(b)(i).
15 The countries are Austria, Belgium, Bulgaria, Cuba, Czechoslovakia, Denmark, Federal Republic of Germany, France, German Democratic Republic, Hungary, Italy, Yugoslavia, Poland, Rumania, Soviet Union, Spain, Upper Volta.
16 "(1) The arbitral tribunal shell apply the law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law determined by the conflict-of-law rules which it considers applicable. (2) The arbitral tribunal shall decide as amiable compositeur or ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so and if the law applicable to the arbitral procedure permits such arbitration. (3) In all cases the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction."
17 "(1) 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) The arbitrator shall assume the powers of an amiable compositeur if the parties have agreed to give him such powers. (3) In all cases the arbitrator shall take account of the provisions of the contract and the relevant trade usages."
18 See Y. Derains, 109 Clunet (1982), p. 967 on the arbitrators' inclination to cite published awards.
19 See cases published in P. Sanders (ed.), Yearbook (1976- ) and in Rev. Arb. (France) and reports, especially by Y. Derains, 101 Clunet (1974- ). Lew also gives very comprehensive reports.
20 ICC 1512/1971, reported by J. D. M. Lew, Applicable Law in International Commercial Arbitration (New York, 1978), No. 106.
21 E.g. ICC 3160/1978, 3349/1978 (unreported).
22 E.g. ICC 893/1955, reported by Lew, supra n. 20, No. 106.
23 On the views of some authors see O. Lando, "Contracts", in K. Lipstein (ed.), International Encyclopedia of Comparative Law, vol. 3, (Hamburg, 1976), chap. 24, Nos. 31, 34, 41; J. D. M. Lew, supra n. 20, at No. 122.
24 J. D. M. Lew, supra n. 20, at p. 106 (No. 128).
25 Ibid.
26 O. Lando, supra n. 23 at Nos. 25-60.
27 The expression is taken from Article 3(1) of the Rome Convention of 19 June 1980 on the Law Applicable to Contractual Obligations. See OJEC (9 Oct. 1980) No. L 266/1.
28 On the courts, see O. Lando, supra n. 23, at Nos. 115-120 and 122-129.
29 Hamlyn & Co. v. Talisker Distillery [1984] AC 202 (HL); Spurrier v. La Cloche [1902] AC 446 (PC); Tzortzis v. Monark Line A/B [1968] 1 Weekly L. R. 406 (CA). See also A. V. Dicey and J. H. C. Morris, The Conflict of Laws, vol. 1: II (London, 1980), pp. 761 et seq.; F. Russell, Russell on the Law of Arbitration, 19th edn. (London, 1979), p. 63.
30 Hamlyn v. Talsker and Spurrier v. La Cloche, supra; F. Russell, supra n. 29, at p. 63. In some cases the selection of an English arbitral tribunal is at the same time the selection of an English court because a party may bring legal questions before the court (special case).
31 Compagnie d'Armement Maritime S.A. v. Compagnie Tunisienne de Navigation S.A. [1971] AC 572 (HL), at p. 596 per Lord Wilberforce.
32 Cass. civ. 19 Feb. 1930 S. 1933.1.41. In a later case the Cour de Paris (26 Oct. 1962) maintained that "the clause by which the contracting parties have agreed to submit disputes arising out of their contact to the decision by arbitrators of a certain country is one of the most significant indications that the contract, as they have conceived it, is localised in the country thus designated". Rev. Crit. (1965), p. 535.
33 Cass. civ. 19 Feb. 1930, supra n. 32.
34 BGH 5 Dec. 1966, AWID (1967), p. 108. IPRspr (1966/67) No. 41b: BHG 1 July 1964. IPRspr (1964/65) No. 38; See also G. Kegel, Internationales Privatrecht 4th edn. (Munich, 1977), p. 292.
35 See J. D. M. Lew supra n. 20, at p. 218 (Nos. 190 et seq.).
36 The contrary has been held by the English Court of Appeal in Tzorties v. Monark Line AV (supra n. 29) where the choice of arbitration in London by a Greek and a Swedish party was considered to be a choice of English law. This, however, was later criticised in the House of Lords in Compagnie d'Armement Maritime S.A. v. Compagnie Tunisienne de Navigation S.A., supra n. 31; See also J. D. M. Lew, supra n. 20, at Nos. 179 et seq.
37 Stockholm Chamber of Commerce, supra n. 2.
38 See J. D. M. Lew, supra n. 20, at p. 218 (Nos. 190 et seq.).
39 This is implied in the Arbitration Rules of the London Court (now, the London International Court) of Arbitration, International Rules. See 1981 edn., Article 13, Schedule of Jurisdiction and Powers of the Arbitrator (3).
40 On these theories, see P. Schlosser, Recht der internationalen privaten Schiedsgerichtsbarkeit, vol. 1 (Tübingen, 1975), Nos. 164 et seq.
41 Ibid.
42 See M. J. Mustill and S. C. Boyd, The Law and Practice of Commercial Arbitration in England (London, 1982), p. 317.
43 Stockholm Chamber of Commerce supra n. 2, at p. 46.
44 Message concernant une loi fédérale sur de droit internationale privé (loi DIP) du 10 nov. 1982, p. 195; P Lalive, "Les R[ é]gles . . .", supra n. 5.
45 Arbitration Act 1979 (c. 42) sections 3-4; see M. H. Mustill and S. C. Boyd, supra n. 42, at pp. 316 et seq.
46 47 II Annuaire, 394 (195) and 48 II ibid. 264 (1959); See J. D. M. Lew, supra n. 20, at p. 277 (No. 227).
47 J. D. M. Lew, supra n. 20, at p. 277 (No. 227).
48 Ibid., p. 256 (No. 235) where Lew cites ICC Award No. 1455/67.
49 On this approach see Y. Derains, "L'Application cumulative par l'arbitre des systèmes de conflit de lois intéressées au litige" 99 Rev. Arb. (1972), p. 99; ICC 1422/1966 and 1980/1972, reported by Y. Derains, 101 Clunet (1974), pp. 884, 897; J. D. M. Lew, supra n. 20, at p. 335 (No. 287); ICC 4434/1983, reported by Y. Derains and S. Jarvin, 110 Clunet (1983), p. 893; ICC Award 3235 reported by Y. Derains, 108 Clunet (1981), p. 985.
50 J. D. M. Lew, supra n. 20, at p. 264 (No. 238); ICC 3880/1982, reported by Y. Derains and S. Jarvin, 110 Clunet (1983), p. 897.
51 ICC 1404/1967, reported by J. D. M. Lew, supra n. 20, at p. 332 (No. 285).
52 O. Lando, supra n. 23, at Nos. 107-142; ICC 4132/1983, 110 Clunet (1983), p. 891; ICC 4434/1983 ibid., p. 893, reported by Y. Derains.
53 E.g. ICC 1717/1972, reported by Y. Derains, 101 Clunet (1974), p. 290.
54 O.Lando supra n. 23, at No. 120 (on the Netherlands).
55 E.g. the German BGH an 19 Sept. 1973, IPRspr. (1973), No. 11.
56 ICC 2735/1976, reported by Y. Derains, 104 Clunet (1977), p. 947. See also the two cases cited at p. 949 and ICC 2870/1978 (not reported).
57 J. D. M. Lew, supra n. 20, at Nos. 302 et seq.
58 ICC 2886/1977, reported by Y. Derains, 105 Clunet, p. 996. See also Y. Derains, "L'Application cumulati[a]ve par l'arbitre des systèmes de conflit de lois intéressés au litige", 99 Rev. Arb. (1972), passim.; J. D. M. Lew, supra n. 20, at Nos. 302 et seq.
59 E.g. ICC 1422/1966, reported by J. D. M. Lew, supra n. 20, at No. 270.
60 ICC 1675/1969, reported by D. Thompson, 101 Clunet (1974), p. 895.
61 J. D. M. Lew, supra n. 20, at Nos. 367-372; ICC 2583/1976, reported by Y. Derains, 104 Clunet (1977), p. 950; ICC 2375/1975, reported by Y. Derains, 103 Clunet (1976), p. 973.
62 O. Lando, supra n. 23, at Nos. 104-142.
63 This viewpoint resembles that of the common lawyer. See J. H. Merryman, The Civil Law Tradition (Stanford, 1969), pp. 50 et seq.
64 R. Pound, An Introduction to the Philosophy of Law (New Haven and London, 1976), pp. 48 et seq.
65 P. Hay, O. Lando and R. D. Rotunda, Conflict of Laws as a Technique for Legal Integration, Integration through Court, vol. 1, bk. 2 (Berlin/and New York, 1986), pp. 161, 173.
66 On this question, see O. Lando, "Conflict-of-Law Rules for Arbitrators", Festschrift für Konrad Zweigert (Munich, 1981), p. 156.
67 See Convention on the law applicable to contractual obligations, opened for signature in Rome on 19 June 1980 (hereinafter: Rome Convention), OJEC (L 266, 9 Oct. 1980), p. 1. The Convention entered into force in Denmark on 1 July 1984.
68 See O. Lando, supra n. 23, at Nos. 115-142.
69 A. V Dicey and J. H. C. Morris supra n. 29, Rule 145, at p. 747; American Law Institute, Restatement of the Law, Second (Conflict of Laws), (St Paul, Minn., 1971), § 187; Rome Convention, Article 3, Austrian Federal Law an Private International Law of 15 June 1978 (hereinafter: Austrian Conflicts Law), Österreichisches BGBI, 304/1978, § 35; Draft of Swiss Federal Law an Private International Law of 1982 (hereinafter: Swiss Draft), at Article 113.
70 A. V. Dicey and J. H. C. Morris, supra n. 29, Rule 145, sub-rules 1 and 2 at pp. 753 et seq.; Restatement, Second, supra n. 69, at § 187, Comment a, vol. 1, at p. 561; Rome Convention, Article 3(1), Austrian Conflicts Law § 35(1); Swiss Draft, Article 113(2).
71 A. V. Dicey and J. H. C. Morris supra n. 29, Rule 145, sub-rule 3 at p. 769; Restatement, Second, supra n. 69 at § 188; Rome Convention, Article 4(1); Swiss Draft, § 188(2).
72 A. V. Dicey and J. H. C. Morris, supra n. 29, at pp. 769 et seq.; Restatement, Second, supra n. 69, at § 188(2).
73 Rome Convention, Article 4(2); Austrian Conflicts Law, § 36; Swiss Draft, Article 114.
74 A. V. Dicey and J. H. C. Morris, supra n. 29, Rule 161, at pp. 870 et seq.,; Restatement, Second, supra n. 69, at § 196; Rome Convention, Article 6; Austrian Conflicts Law, § 44; Swiss Draft, Article 118.
75 A. V. Dicey and J. H. C. Morris, supra n. 29, Rule 153, at p. 829; Restatement, Second, supra n. 69, at §§ 189 and 190; Rome Convention, Article 4(3); Austrian Conflicts Law, § 42; Swiss Draft, Article 116.
76 See terminology in P. Fouchard, "L'Arbitrage international en France après le décret du 12 mai 1981", 109 Clunet (1982), pp. 374, 394 et seq.; see also B. Goldman, "La Lex mertatoria dans les contrats et l'arbitrage internationaux, réalités et perspectives", The Influence of the European Communities upon Private International Law of the Member States (Brussels, 1981), pp. 209, 211 et seq. (also published in 106 Clunet (1979), p. 475.
77 See Y. Derains, "New Trends in the Practical Application of the ICC Rules of Arbitration", 3 NW. J. Int. L.Bus. (1981), p. 40; 109 Clunet (1982), p. 968.
78 J. D. M. Lew, supra n. 20, at pp. 367, 372, No. 139.
79 See P. Fouchard, L'Arbitrage commercial international (Paris, 1965), No. 579 .
80 On the theories, see O. Lando, "Den ikke-nationale handelsvoldgift", Liber Amicorum in Honour of Alf Ross (1969); pp. 295, 302 et seq.
81 Some authors treat the rules common to the international business community - the new law merchant - together with the rules of a national system; see B. Goldman, supra n. 76, at p. 214; Article 42(1) of the Convention on the Settlement of Investment Disputes of 1965 provides for such a combined approach to the subject see infra n. 123. This raises inter alia, the following questions of hierarchy: May the arbitrator apply the rules of the law merchant when they are in conflict with the mandatory rules of the national law? May he replace the directory rules of the national law wich rules or solutions which, though not yet to be found in the law merchant, are better suited to international contracts?
82 See P. Fouchard, supra n. 79 at. Nos. 575-630; ibid., 106 Clunet (1982), p. 395.
83 See Article V of the Iran-US Claims Settlement Declarations of 19 Jan. 1981, 75 Am. J. lnt. Law (1981), p. 422.
84 See U. Drobnig, "Der Vertrag im Zivilrecht und im Völkerrecht, ein vergleichender Streifzug", Ius inter Nationes: Festschrift für Stefan Riesenfeld (Berkeley-Kölner Rechtsstudien), vol. 17, (Heidelberg, 1983), p. 31.
85 See Part IV of this paper.
86 E.g. see ICC 2879/1978, 106 Clunet (1979), p. 989.
87 See ICC 3327/1981, 109 Clunet (1982), pp. 971, 973.
88 ICC 4505/1984 (unpublished).
89 See the illustration, infra n. 106.
90 See N. Horn, "Die Entwicklung des internationalen Wirtschaftsrechts durch Verhaltensrichtlinien", 44 RabelsZ (1980), pp. 423-454; R. Blanpain, The OECD Guidelines for Multinational Enterprises and Labour Relations 1976-1979 (Dordrecht, 1979), pp. 125 et seq.
91 See M. J. Bonell, "The Unidroit Initiation for the Progressive Codificatian of International Law" (1978), 27 ICLQ (1978), p. 413 ; O. Lando, "European Contract Law", 31 Am. J. Comp. L. (1983), p. 653.
92 ICC 3894/1981, 109 Clunet (1982), p. 987; ICC 3281/1981, ibid., p. 990.
93 UNECE Doc. No. 1953 (188).
94 Y Derains, 109 Clunet (1982), p. 967, notes that a growing number of ICC awards now make reference to earlier awards published in Clunet where publication of selected awards began in 1974.
95 See J. D. M. Lew, supra n. 20, passim; O. Lando, supra n. 66, at p. 157.
96 E.g. see F. A. Mann, "Lex facit arbitrum", International Arbitration Lieber Amicorum for Martin Domke (The Hague, 1967), p. 157; M. J. Mustill and S. C. Boyd, supra n. 42, at p. 611; F. Russell, supra n. 291, at p. 230; P. Schlosser, supra n. 40, vol. 1, at Nos. 159 et seq.; E E. Klein, "De l'autorité et de la loi dans les rapports commerciaux internationaux", Festschrift für E A. Mann (Munich, 1977), p. 617.
97 See II. B.3(b) of this paper.
98 See B. Hjejle, Frivillig Voidgif, 2nd edn. (1983), pp. 82 et seq.; H. Jokela, "Finland", Yearbook, vol. 5 (1980), p. 50.
99 See O. Lando, Kontraktstatuttet (Copenhagen, 1962), p. 290.
100 See K. Zweigert and H. Kötz, Einführung in die Rechtsvergleichung, 2nd edn. (Tübingen, 1984), vol. 2, sect. 7 .
101 See O. Lando, supra na. 23, at Nos. 4, 142.
102 On the difficulties of ascertaining a foreign law see Materialien zum ausländischen und internationalen Privatrecht, vol. 10: "Die Anwendung ausländischen Rechts im internationalen Privatrecht" (1968), passim and p. 184, where Kegel refers to it as the "Secret King" of the conflict of laws; see also E. Rabel, Confict of Laws (Ann Arbor, 1958), vol. 4, pp. 473 et seq.
103 The published awards show several instances of a preference of the; lex mercatoria for the intricacies of private international law; see e.g. the ICC award of 26 Oct. 1979, reported infra at n. 112; also the Ad hoc Award of 23 July 1981, Yearbook, vol. 8 (1983), pp. 89, 91.
104 See Ugeskrift for Restvaesen (Supreme Court) 1952 A, 969, 1957 A, 358.
105 This has been acknowledged by the Paris Tribunal de grande instance in a judgment of 4 Mar. 1981; see 108 Clunet (1981), p. 836. Parties sometimes submit their dispute to the lex mercatoria and amiable composition, e.g., in ICC 4505/1984 (unpublished).
106 This solution, however, would have been less compelling upon the arbitrator if one of the legal systems involved had not provided for any cut-off period.
107 See J. D. M. Lew, supra n. 20, at Nos. 252 et seq.
108 E.g. B. Goldman in several of his writings; see e.g. "Frontières du droit et lex mercatoria", 177 Archives de philosophie du droit (1984); P. Fouchard, L'Arbitrage commercial international (Paris, 1960), pp. 401-458.
109 P. Fouchard, supra n. 76, at pp. 395 et seq.; J. Robert, L'Arbitrage: Droit interne, droit international privé, 5th edn. (Paris 1983), Nos. 330 et seq.
110 In favour of the lex mercatoria: B. von Hoffmann, "Lex mercatoria vor internationalen Schiedsgerichten" IPRax (1984), p. 106 ; R. K. Neuhaus, Die Grundbegriffe des internationalen Privatrechts, 2nd edn. (Tübingen, 1976), pp. 15, 391; P Lalive, supra n. 155. Among those opposed are: F. E. Klein, supra n. 24; F. Schlosser, supra n. 24; D. Martiny, Before Article 7, EGBGB No. 21, Münchener Kommentar zum Bürgerlichen Gesetzbuch, vol. 7 (Munich, 1983).
111 F. Schlosser, supra n. 40, at No. 623.
112 Fabalk Ticaret v. Norsolor IPRax (1984), p. 97; see B. von Hoffmann, supra n. 110, at p. 106. As regards the request of the Turkish party for enforcement in France, the French Cour de cassation held that recognition and enforcement would not be carried out in France if it would be contrary to "international public order" under Article 1502 (5) of the Code of Civil Procedure; however, this was not the case here: (1985) XXIV I.I.M. 360.
113 See F. A. Mann, supra n. 96; M. J. Mustill and S. C. Boyd, supra n. 42; F. Russell, On Arbitration, 19th edn. (London, 1979).
114 J. D. M. Lew, supra n. 20, at Nos. 343 et seq.: C. M. Schmitthoff, "The Law of International Trade, its Growth, Formulation and Operation", in Sources of the Law of International Trade (London, 1964).
115 M. J. Mustill and S. C. Boyd, supra n. 42, at p. 704.
116 F. Russell, supra n. 113, at pp. 230-232.
117 Eagle Star Insurance Co., Ltd. v. Yuval Insurance Co. Ltd. (1978) 1 Lloyd's Rep., p. 357 (CA).
118 According to M. J. Mustill and S. C. Boyd, an agreement to apply the lex mercatoria is on equal footing with an "equity" clause; see supra n. 42, at pp. 605, 611.
119 1979, c. 42; see M. J. Mustill and S. C. Boyd, supra n. 42, at pp. 525 et seq.
120 Arbitration (International Investment Disputes) Act 1965 (c. 41). The International Centre for the Settlement of Investment Disputes (ICSID) was established by virtue of the Washington Convention of 18 Mar. 1965.
121 G. R. Delaume, "Le Centre international pour le règlement des différents relatifs aux investissements (CIRDI)", 109 Clunet (1982), pp. 775, 825.
122 J. D. M. Lew, supra n. 20, at No. 345; G. R. Delaume, supra n. 121, at p. 828.
123 Award of 30 Nov. 1979; see G. R. Delaume, supra n. 121, at pp. 829 et seq., Yearbook, vol. 8 (1983), pp. 133, 140.
124 See San Marine Compania de Navegacion SA v. Saguenay Terminals, Ltd 293 F2d 796 (1961) referring to Wilko v. Swam, 346 US 427, 436, and Bernhardt v. Polygraphic Co., 350 US 198, 203. In the last decision it was said obiter that "a manifest disregard of the law might be present when the arbitrators understand and correctly state the law that proceed to disregard the same". See also M. Domke, The Law and Practice of Commercial Arbitration (Mundelein, 1968), pp. 245 et seq.
125 The Scandinavian philosopher Alf Ross asserted that the postulate that a proposed rule is a rule of law is only more or less probable. From this must follow that, although the number of "highly probable" rules may be considerably higher in one legal system than in another, this difference of degree cannot lead to a rejection of the latter as a legal system; see A. Ross, Ret og retfaerdighed (1953), pp. 51 et seq.
126 See B. Hjejle, supra n. 98, at pp. 82, 181; B. Gomard, Voldgift i Danmark (Arbitration in Denmark) (1979), p. 43.
127 See B. Hjejle, supra n. 98, at pp. 125 et seq.
128 See B. Goldman, supra n. 76, at p. 215.
129 Denmark: B. Hjejle, supra n. 98, at pp. 82 127; B. Gomard supra n. 126, at p. 43. England: see E. Russell, supra n. 116, at pp. 230-232. France: Code of Civil Procedure, Article 1504 (cf 1502). Sweden: Arbitration in Sweden 2nd edn. (Stockholm, 1984), p. 126. United States, supra n. 124. West Germany: K. H. Schwab, Schiedsgerichtsbarkeit, 3rd edn. (Munich, 1979), pp. 173-176.
130 On the position of the Italian Corte di cassazione see judgment of 8 Feb. 1982, 18 Ria. dir. int. priv. proc. (1982), p. 829.
131 See Y. Derains, "Possible Conflict-of-Law Rules arid ehe Rules Applicable to the Dispute", UNCITRAL's Project for a Model Law an International Commercial Arbitration (Deventer, 1984), p. 192.
132 Upholding an ICC award made in Germany, the Oberlandesgericht Frankfurt assumes "that the award is not based upon a world trade law which rests on customs and which is unbound by national law, the so-called lex mercatoria". This obiter dictum expresses the view that German courts would consider it a violation of the German Code of Civil Procedure (§ 1041 (1) No. 1) on infringement of due process (unzulässiges Verfahren) if an arbitrator applied the lex mercatoria to a case where the parties pleaded the application of national law. Reference is made to K. H. Schwab, supra n. 129, p. 173. Here it is stated that in such a case a decision ex aequo et bono would violate due process. See decision of 21 Dec. 1983, IPRspr. (1983), No. 197.
133 Y. Derains, 107 Clunet (1980), p. 967.
134 See A. V. Dicey arid J. H. C. Morris, supra n. 29, at p. 748; O. Lando, supra n. 23, at Nos. 177-231.
135 OJEC (1980), No. L 266/1. The Convention entered into force in Denmark on 1 July 1984 (Act. No. 188 of 9 May 1984). The Convention has also been cited in arbitral awards: see ICC 2730/1982, reported by Y. Derains, 111 Clunet (1984), pp. 914-915.
136 Article 10.
137 Article 7(2). On English law see A. V. Dicey and J. H. C. Morris, supra n. 29, at p. 801, Rule 149, Exception 2.
138 Article 22 of the Convention grants the Contracting States the right not to apply Article 7(1). On English law see A. V. Dicey and J. H. C. Morris, supra n. 29, at p. 789, Rules 149 and 792, Rule 149, Exception 1.
139 ICC Award 1110 of 15 Jan. 1963; see J. D. M. Lew, supra n. 20, at No. 423.
140 K. Zweigert and H. Kötz supra n. 100, vol. 2, sect. 1 and vol. 3, pp. 11 et seq.; O. Lando, "Renegotiation and Revision of International Contracts", 23 Ger. Yb. Int. L. (1980), p. 37.
141 C. M. Schmitthoff, "The US Government later lifted the ban" J. Bus. L. (1982), p. 359; see A. V. Lowe, "Public international Law and the Conflict of Laws: The European Response to the United States Export Administration Regulations" 33 ICLQ (1984), p. 515; A. V. Lowe, "The Problems of Extraterritoriality: Economic Sovereignity and the Search for a Solution", 34 ICLQ (1985), p. 724.
142 See the ICC Rules of Arbitration 1976, Article 26 reads as follows: "In all matters not expressly provided for in these Rules, the Court of Arbitration and the arbitrator shall act in the spirit of these Rules, and shall make every effort to make sure that the award is enforceable at law."
143 See ICC Award 3281/1981, reported by Y. Derains, 109 Clunet (1982), p. 990; ICC 2136/1974, ibid., p. 993; ICC 2730/1982, 111 Clunet (1984), p. 914; ICC 4265/1984, ibid., p. 922; ICC 3916/1982 (reported by S. Jarvin), ibid., p. 930; ICC 1859/1973, reported by Y. Derains, Rev. Arb. (1973), p. 222. See also Y. Derains, "Les Normes d'application immédiate dans la jurisprudence arbitrale internationale". Le Droit des relations économiques internationales. Etudes offertes à Berthold Goldman (Paris, 1982), pp. 29, 40.