Introduction

Transactions conducted under international commercial contracts, in particular those related to the sale of goods, are considered to form the backbone of international trade.

When considering an international commercial contract, two questions are of key importance: (1) where will disputes arising under the contract be heard; and (2) what law or rules govern the contract. A typical best practice would be for contractual parties to answer both of these questions by including in the contract a choice-of-forum clause and a choice-of-law clause.

While there are certain exceptions and limitations, the relevant rules in the vast majority of States allow for party autonomy, permitting parties to select both the forum and governing law for their contracts. If parties fail to select an applicable law, a court accepting jurisdiction of the dispute will have to apply the relevant conflict rules of private international law to determine which law is applicable to the contract, including any international instruments that might apply by default. The rules of private international law are notoriously complex.

In international commercial practice, it is common for parties to choose arbitration as the method for resolving the dispute.International commercial arbitration may be particularly popular because, unlike for court judgments, there is a single nearly comprehensive regime for enforcement of foreign arbitrary awards (governed by the conventions and treaties).

Arbitral tribunals are governed by the arbitration law at the seat of arbitration. The vast majority of international commercial arbitration laws, many derived from the UNCITRAL Model Law on International Commercial Arbitration also recognize party autonomy, permitting parties to choose the rules of law applicable to the contract. In addition, arbitral tribunals, unlike most courts and depending on the law at the seat of arbitration, may be authorized to decide cases based on general principles of fairness and justice without applying a specific law or to apply “rules of law,” such as lex mercatoria and the Unidroit Principles of International Commercial Contracts 2010 without reference to any national law.

DETERMINATION OF THE APPLICABLE LAW BY THE PARTIES

 When an arbitrator has to decide which law to apply for the solution of the dispute, he may find a contractual clause providing an express choice of law1 : “The validity, construction and performance of this contract shall be governed by and in accordance with the law of…” or similar provisions. The parties may provide for the application of some national law or for some nonnational set of rules. 

IF THE PARTIES CHOOSE A NATIONAL LAW 

In such situation, the arbitrator has to decide: should he test the autonomy of the parties in choosing the applicable law under a conflict of laws system or should he recognize that freedom without relying on any conflict of laws rule? The party autonomy is widely recognized both in common law and civil law. However, not every country gives parties unlimited freedom to choose the applicable law. Since every right, power or duty of a person has its root in the law of the nation, even the party autonomy principle as well as arbitration as a whole, must rely on and derive its existence from a national law system. The arbitrator must analyze the party autonomy under the conflict of laws of the lex fori and he can also disregard the choice of the parties if they did not select the national law with which the contract has its closest connection. In so doing they can find an agreement that they probably could not have reached if they had applied the national law of either party. Those factors make the choice of the parties “appropriate” – meaning that for those reasons the contract has sufficient connections with that law such as to admit that choice. 

IF THE PARTIES CHOOSE A NON-NATIONAL SET OF RULES 

Non-national standard has been defined in different ways: international law, international customs or usages, transnational law. In spite of all these different labels probably the same phenomenon reoccurs: a set of rules developed to regulate international trade in the merchants’ community. The question is whether an arbitrator should respect the choice of the parties. Furthermore, not being a highly developed system, lex mercatoria does not cover all the matters which might be the object of a dispute. 

Determination of the Applicable Law by the Arbitrator When the Parties Do Not Make a Choice.

It so happens that an agreement is sound but when parties reach the stage of selecting the applicable law they face a difficult situation. They come from different countries and therefore they are not acquainted with and do not confide in the respective national laws. Why is the determination of the applicable law by the arbitrator a problem in an international commercial arbitration?

(i) Application of the Conflict of Laws System of the Country Which Would Have Had Jurisdiction in the Absence of an Arbitration Clause The conflict of laws system controlling arbitration is that of the country which would have had jurisdiction to settle the dispute between the parties if they had not included the arbitration clause in the contract. That country has been in reality dispossessed of its jurisdictional authority by the arbitration clause and therefore it may reaffirm its control over arbitration in this way. The theory has been criticized mainly on two grounds. An arbitrator, under Anzilloti’s theory, has the difficult burden to determine which national court would have had jurisdiction if parties had not submitted to arbitration. Second, this solution is not acceptable because it is circular. An arbitrator has to select a conflict of laws rule to know which country would have had jurisdiction; hence the issue of the applicable private international law system arises again. 

(ii) Application of the Conflict of Laws System Where the Arbitral Tribunal Has Its Seat Under this theory, the will of parties is respected: they can freely choose the seat of arbitration and therefore indirectly select the applicable conflict of laws rule. An arbitration clause, as any other contract between private parties, cannot be suspended in the air, but must draw its authority from a national law provision. 

(iii) Application of the Conflict of Laws System: 

Three Trends 

It has often been suggested that the conflict of laws rules of the arbitrator should apply. The first question is: what test should be followed: the nationality, the domicile or the residence of the arbitrator? The argument in favor of this theory is that an arbitrator has the best knowledge of his personal law. It is very easy to object that in an ICA the two parties come from different countries and therefore an arbitrator choosing the law of either party leaves the other one unsatisfied. The third and last example is the attempt to apply the private international law system of the state where the arbitral award will be enforced. 

(iv) Cumulative Application of the Conflict of Laws Systems Connected with the Dispute An arbitrator, instead of applying one of the conflict of laws systems mentioned in the previous sections, looks at all the systems that have any contact with the dispute.4 From this analysis, might ascertain that these systems lead to the same solution: they all select the same national law as applicable to the contract. 

(v) Application of a Substantive National Law without Having Recourse to any Conflict of Laws System The substantive conflicting laws may contain different provisions, hence leading to dissimilar solutions of the dispute: this is a so-called true conflict of laws situation. In this context a national court would usually apply its private international law rule. When the intention of the parties to a contract with regard to the law governing it is not expressed and cannot be inferred from the circumstances, the contract is governed by the system of law with which the transaction has its closest and most real connection. 

INTERNATIONAL CONVENTIONS’ PROVISIONS AND ARBITRAL INSTITUTIONS’ RULES ON THE APPLICABLE LAW 

(i) New York Convention on Recognition and Enforcement of Foreign Arbitral Awards Its purpose is to render compulsory among contracting parties the enforcement of arbitral awards. Therefore the specific subject of the Convention does not interfere with the issue at hand: the applicable law in an international commercial arbitration. The provision is dealing exclusively with the arbitration agreement and not with the whole contract. It is undisputed today that the two issues, the validity of the arbitration agreement and the validity of the contract, are separate and therefore the law applicable to the former is not necessarily the same one applicable to the latter. Consequently a national court could refuse enforcement of the award if the arbitration clause was invalid under either law of article V (l) a, but it could not if any other substantive provision of the contract was invalid under that law.

 (ii) European Convention on International Commercial Arbitration, April 21, 1961 In contrast with the New York Convention, article VII of the European Convention specifically deals with the issue of the applicable law in an international commercial arbitration. 

(iii) Rules of Arbitral Institutions on the Applicable Law The International Chamber of Commerce, the UNCITRAL, the UNECAFE and the UNECE Arbitration Rules, contain specific provisions dealing with the law applicable in an international commercial arbitration. All three provisions follow the pattern of the 1961 European Convention: recognition of the principle of party autonomy, the rule of conflicts which the arbitrator deems applicable and the relevant trade usages.

 THE RATIONALE UNDERGIRDING THE DEBATE OF CHOICE OF LAW 

Some authors support lex mercatoria, “denationalization” of arbitration and the idea that arbitration should not be necessarily bound by any national conflict of laws rule. Another part of the doctrine, as authoritative as this, argues against lex mercatoria and any attempt to detach arbitration from any national law system. It is important to stress that international commerce needs a “denationalization” of arbitration and that international merchants look at an arbitration as disconnected from any national law system. One has to demonstrate how this new legal order, in which international arbitration plays such an important role, can subsist theoretically.

Indian private international law is majorly governed by judiciary decisions in concrete cases. The courts have generally adopted the English rules of private international law. The Supreme Court in Delhi cloth and General Mills V. Harnam Singh had to decide whether Indian private international law gave the parties the freedom to choose whatever governing law from any part of the world. The case pertained to the recovery of balance from the plaintiff who resided in Pakistan and was in business with the defendant in India.

Restrictions on the power to choose the proper law

There are many reasons for the power of choosing the proper law in the very beginning of the contract, firstly, it gives the parties a feeling of certainty as to the governing law, secondly, in domestic systems of law, the parties are largely free to choose the terms of their contract for themselves, from which the power to choose the governing law automatically follows as an apparent and rational expansion. However, there are some limitations as well to the power of parties to choose the proper law such as :

1. Mandatory rules of domestic law– Some rules of the domestic law are not optional, but mandatory, which means they are applicable irrespective of any agreement of the parties to the contrary. For instance, the rules which render the contracts void on the ground of public policy, etc. This is to say that if parties are allowed an unrestricted choice of the governing law, there will be chances on evasion from mandatory rules of the country with which the contract is most closely connected, whose purpose may be to protect the public interest or to protect the interests of a particular class, such as employees or consumers. Moreover, in the Vita Foods case, it was held by the court that the only general limitation on the choice of the parties regarding the governing law is that it must be made with bonafide intention and it must be legal.
2. The law of the country with which the contract is most closely connected– in some cases, where the choice of proper law cannot be derived either expressly or impliedly from the contract, then the law of the country with which the contract is most closely connected is deemed the proper law. The court, in this regard, considers various factors such as the place of making the contract, the place of performance of the contract, the connection of the parties with the countries, the site of any immovable property which is the subject matter of the contract, etc. However, it is sometimes hard to determine the close connection itself.
3. Convenience and business efficiency– When the interest of the parties is emphasized in the contract, then the court evaluates the contract in terms of business efficiency and convenience. For this, the court looks at multiple factors with varying relevance while deciding these connections, for instance, the factors like the place of making the contract or the place of performance may not be as important as the place where the parties carried their business or where they reside in. Moreover, in relation to the interest of the parties, the law of that country with whom the party belongs will usually be the accurate law. However, it is still not easy to answer the question that the law of which party must be preferred, in an international contract.

Conclusion

In sum, it can be said the choice of laws in context of international commercial contracts has been a complex space for stakeholders. The challenge posed of choice of laws do get amplified when there’s an ambiguity regarding the principles that are the fundamentals for International commercial contracts in Indian experience, thus it becomes relevant for the courts to resonate with international trends which provide certain fundamentals for the adjudication of suits related to international contract. This suggestion becomes more relevant in the context of increasing global trade, since it inevitably results in an increase in disputes between parties. Hence, the courts need to lay down more predictable and certain standards for the parties to choose a proper law while their autonomy of the latter remains unharmed.