An arbitral proceeding is a form of dispute resolution which often is regarded as a more efficient way of resolving international commercial disputes than a proceeding in national court.  The reasons for choosing arbitration as a means of dispute resolution are that the arbitral proceeding often is faster and therefore also cheaper than court proceedings. The arbitral proceeding is further private and confidential. The parties have a right to appoint their own arbitrators who are specially qualified for the dispute in question. The arbitral proceeding is flexible. The arbitral award is binding and final (within certain limits) and cannot be challenged on the merits. А key advantage of arbitration, it is the freedom to choose applicable substantive law which also provides an important factor for parties who choose arbitration as a means of dispute resolution.

When parties enter into a contract that has connections with more than one State, the question of which set of legal rules governs the transaction necessarily arises. The answer to this question is obviously important to a court or arbitral tribunal that must resolve a dispute between the parties but it is also important for the parties themselves, in planning the transaction and performing the contract, to know the set of rules that governs their obligations.

The parties have freedom to choose the law governing their contract. This choice may apply to only part of the contract, it may be exercised at any time, and  no connection between the law chosen and the parties or their transaction is required.

According to the conventions and rules on arbitration the parties may choose for themselves the law applicable to the dispute. Article VII of the European Convention on International Commercial Arbitration,  1961, provides that ‘failing any indication by the parties as to the applicable law, the arbitrators shall apply the proper law under the rules of conflict that the arbitrators deem applicable’. Although the European Convention of 1961 refers to ‘rules of conflict’, these are not necessarily the rules of conflict of the country in which the arbitration has its seat; on the contrary, the reference is to the conflict rules that the arbitrators deem applicable.

Rules of Arbitral Institutions on the Applicable Law The International Chamber of Commerce, the UNCITRAL,  also recognize the principle of party autonomy, the rule of conflicts which the arbitrator deems applicable and the relevant trade usages.

A similar approach is adopted in the Model Law.  The intention is to make it clear that the arbitral tribunal is entitled to choose the governing law of the contract in the absence of any express or implied choice of law by the parties themselves.

Parties to an international commercial agreement should make full and proper use of this freedom, inserting a ‘choice of law’ clause into their contract.

The choices that may be available to the parties include:

• national law;
• public international law (including the general principles of law);
• concurrent laws (and combined laws—the tronc commundoctrine);
• transnational law (including international development law, the lex mercatoria, codified terms and practices, and trade usages); and
• equity and good conscience.

The law chosen by the parties has the widest scope of application.  According to the Principles on Choice of Law in International Commercial Contracts,  published by the Hague Conference on Private International Law, the law chosen by the parties shall govern all aspects of the contract between the parties, including but not limited to –

(a) interpretation;

(b) rights and obligations arising from the contract;

(c) performance and the consequences of non-performance, including the assessment of damages;

(d) the various ways of extinguishing obligations, and prescription and limitation periods;

(e) validity and the consequences of invalidity of the contract;

(f) burden of proof and legal presumptions;

(g) pre-contractual obligations.

A court may exclude application of a provision of the law chosen by the parties only if and to the extent that the result of such application would be manifestly incompatible with fundamental notions of public policy (ordre public) of the forum.

The law of the forum determines when a court may or must apply or take into account the public policy (ordre public) of a State.

The party autonomy to choose the applicable law do  not apply for consumer and employment contracts. This exclusion is justified by the fact that the substantive law of many States subjects consumer and employment contracts to special protective rules from which the parties may not derogate by contract. These rules are aimed at protecting the weaker party – consumer or employee – from an abuse of the freedom of contract and this protection extends to private international law where it appears as an exclusion or limitation on party autonomy.

The parties may choose a law to govern their contract either expressly or tacitly. An express choice of law agreement may be made before, at the same time as, or after the conclusion

of the main contract. Choice of law agreements are usually included as an express clause in the main contract. The use of particular words or phrases is not necessary. Phrases such as the contract is “governed by” or “subject to” a particular law meet the requirements of an express choice.

A choice of law may also be made tacitly. A tacit choice of law must appear clearly from the provisions of the contract or the circumstances. One has to take into account both the terms of the contract and the circumstances of the case.

If the parties’ intentions are neither expressed explicitly nor appear clearly from the provisions of the contract or from the particular circumstances of the case, there is no choice of law agreement. In such a case, the applicable law will be determined by the court or arbitral tribunal.

In such an event, the arbitral tribunal will generally decide that the contract is to be governed by the law of the country with which it is most closely connected. It will be presumed that this is the country that is the place of business or residence of the party that is to effect the performance characteristic of the contract. However, this presumption does not apply if the place of characteristic performance cannot be determined.

In other cases the court or arbitral tribunal may make an assumption that  choice of forum is choice of law.  If the parties make no express choice of law, but agree that any disputes between them shall be litigated in a particular country, it is generally assumed that they intend the law of that country to apply to the substance of their disputes.

In reaching its decision on the law to be applied in the absence of any choice by the parties, an arbitral tribunal is entitled (unless otherwise directed by the applicable rules or the lex arbitri) to select any of the systems or rules of law upon which the parties themselves might have agreed, if they had chosen to do so.

 In practice,  parties to an international commercial contract would do well to make a specific choice of law, rather than to leave the matter to be determined by a court or arbitral tribunal.