Module 2 - International Arbitration

LEGAL CONTEXT OF INTERNATIONAL
ARBITRATION
Dr. Shirish Kulkarni
International Arbitration Symbiosis Law School, Pune

INTRODUCTION TO THE MODULE
Historical Perspective of Law Applicable to International Arbitration

• During the Medieval and Renaissance eras, merchant guilds and trading cities
established their own arbitration systems. These systems facilitated cross-border
trade by providing efficient dispute resolution mechanisms. Notable examples include
the Hanseatic League and the Lex Mercatoria
FgG
(Law Merchant).
• Post this period, after the three major milestones in the history of international
arbitration (the Jay Treaty, Alabama Claims and Formation of PCA), concrete
systems of law developed with respect to arbitration – both procedural and
substantive,
• The medieval period, however, serves as the foundation for legal principles and
systems in present-day international arbitration.
Impact of Lex Mercatoria

• Lex Mercatoria is nothing but a set of general trade principles that were used in the
medieval age to resolve commercial disputes by guilds and communities of merchants
and traders.
• Since lex mercatoria recognized the reasonable
FgG
expectations of parties to a contract as
the primary source of their rights, obligations and risk allocations, the same principle
has been adopted in modern-day contract laws, which serve as the primary
instruments for substantive application in international arbitration.
• The unified approach taken by lex mercatoria to interpret and apply contractual terms,
without a bias to a particular legal system, has been adopted in modern-day
international arbitration
Impact of Lex Mercatoria
• Furthermore, a number of cases recognize lex mercatoria principles as a valid

source to determine the result of a dispute in international arbitration.
• In ICC Case No. 1110 (1988), the arbitral tribunal applied lex mercatoria to
resolve a dispute between a French company
FgG and an Italian company. The
tribunal considered trade usages and industry practices to determine the parties’
rights and obligations.
• Additionally, in ICC Case No. 1113 (1999), lex mercatoria was invoked to
interpret a contract between a German company and a Chinese company. The
tribunal relied on general principles of international trade to decide the dispute.
Need for Procedural and Substantive Laws in International Arbitration
• The need for separate procedural and substantive laws lies in the fact that the
procedure of the arbitration (which depends on the agreement to arbitrate
between parties) and the substance (which depends on the contract between the
parties) are two separate factors. FgG
• This is governed by the Doctrine of Separability, which states that the

arbitration agreement is separate from the contract between the parties and even
if the contract itself is void, the claim can still be admissible, owing to the validity
of the arbitration agreement.
• This was first observed in Gosset v. Caparelli (1963) and was followed in the
case of Prima Paint Corp. v. Flood & Conklin (1967).
Need for Procedural and Substantive Laws in International Arbitration
• Even in the modern times, courts have taken the view that it is not feasible to
apply the same legal instruments to procedure and merits (Enka v. Chubb
(2020)).
• Therefore, it can be noted that arbitration
FgG warrants a separate set of principles
governing substance and procedure.

• Thus, the substantive law is required for the tribunals to rule on issues of
substance of the contract (e.g. – breach, non-performance, etc.)
• On the other hand, procedural law is required to rule on the conduct of
proceedings, admissibility, jurisdiction, etc.
CONTENTS
I. APPLICABLE 3. LEX MERCATORIA, UCP

AND UNIDROIT 5. CONVENTION ON
SUBSTANTIVE LAWS
PRINCIPLES THE
INTERNATIONAL
2. APPLICABLE 4. PROCEDURAL RULES SALE OF GOODS
PROCEDURAL LAWS (UNCITRAL, ICC, LCIA
AND SIAC)
I. APPLICABLE SUBSTANTIVE LAWS
Types of Laws Applicable to Arbitration

• In general, two primary forms of law are applicable to any legal procedure – substantive
and procedural.
• The same is true in the case of arbitration, where both substantive and procedural laws are
applicable.
FgG
• Procedural law is mainly categorized into 4 – i. lex arbitri, ii. law applicable to the
agreement, iii. law applicable to the capacity to arbitrate and iv. lex executionis.
• Substantive law, on the other hand, is the law that governs the merits of the contractual
dispute itself, and is referred to as lex contractus.
• The lex contractus governs the existence, validity and interpretation of the main contract.
It also governs any non-contractual claims (e.g., tort claims), which may be brought before
Scope of Substantive Laws

The substantive law covers various aspects:
• Existence and validity of the main contract: It governs whether the contract is
legally binding and enforceable.
• Interpretation of contract terms: It clarifies
FgG the meaning and intent behind
contractual provisions.
• Rights and obligations of the parties: It defines what each party is entitled to and
obligated to perform.
• Liabilities for breach: It outlines consequences if either party fails to fulfill its
contractual obligations.
Determining Substantive Law

• There may be two situations – a. parties have decided on the substantive law,
and b. parties have not decided on the substantive law.
• In the first case, the law chosen by parties shall apply to the merits of the
dispute.
• However, in the second case, the applicable substantive law shall be decided by
the tribunal. The power is vested in them by a number of national arbitration
laws as well as the UNCITRAL Model Law [Art. 28(1) and Art. 28(2)].
• In India, the power is vested by Section 28 of the Arbitration and Conciliation
Act, 1996 and was reaffirmed by the Supreme Court of India in the BALCO case.
Determining Substantive Law

Where the parties have not determined a substantive law for their contract, tribunals mainly rely on two
methods to determine the same, which are as follows:
• Voie Indirecte (the Indirect Method) – This is a rather traditional approach which functions like a legal
compass, guiding the tribunal towards the legal system with the "closest connection" to the dispute.
This method often relies on the conflict of laws rules established by the chosen arbitral institution or
the seat of arbitration.
• Voie Directe (the Direct Method) – This more contemporary approach empowers the tribunal to
directly choose the law they find most appropriate, bypassing a predetermined set of conflict of laws
rules. This method offers greater discretion and can be particularly useful in complex disputes with
connections to multiple jurisdictions. Arbitral institutions like the ICC favor this approach, granting their
Determining Substantive
Voie Indirecte
Law
• Law of the Seat of Arbitration – Historically, a number of tribunals applied the law of the seat to the substance of the contract. This
has, however, seen a decline since choice of law rules of the forum was seen as an “unnecessary fetter” on party autonomy (Lawrence
Collins, 2012). In ICC Case No. 2930, the ICC tribunal observed that in present-day arbitration, the tribunal is not bound to rely on
conflict rules of the forum as the substantive law when choice is absent.
• Closest Connection – Some national legislation and institutional rules mandate tribunals to adhere to the conflict of law rules of the
State they deem most closely linked to the dispute, employing criteria such as potential enforcement jurisdiction, the intended
jurisdiction if not for arbitration, and the contract's conclusion or execution State. This poses uncertainties for tribunals. Even when
not obligatory, tribunals often utilize the closest connection test, deeming it a transnational principle of private international law and
a suitable conflict of laws rule. This method is favored for its adaptability to unique contractual circumstances. However, in modern
Determining Substantive
Voie Indirecte
Law
• Characteristic Performance – This test applies the domicile of the person “exercising characteristic performance.” For example, Art.
4(2) of the Rome I Regulation (which applies to contractual disputes in the EU) stipulates that, in the absence of choice by the parties,
the domicile of the person exercising characteristic performance is the preferred method of resolving choice. Applying the characteristic
performance test raises several issues. Modern international commerce, shaped by technology and globalized businesses, complicates
defining characteristic performance. Additionally, this method may favor certain types of contracting parties, as noted by Petsche.
While offering some precision, the test lacks applicability in intricate contractual settings lacking a clear characteristic performance,
such as turnkey agreements, technology transfers, mining concessions, and joint ventures.
• Cumulative Method – This method consists of simultaneously considering all of the choice of law rules of all legal systems with
which the dispute in question is connected. If these rules result in the same substantive law, the tribunal will apply this law to the
merits of the dispute. In theory, this method applies a “false conflict” ideology to demonstrate that all analyses would lead to the same
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LEGAL CONTEXT OF INTERNATIONAL

International Arbitration Symbiosis Law School, Pune

Historical Perspective of Law Applicable to International Arbitration

Impact of Lex Mercatoria

Impact of Lex Mercatoria

• Furthermore, a number of cases recognize lex mercatoria principles as a valid

Need for Procedural and Substantive Laws in International Arbitration

• This is governed by the Doctrine of Separability, which states that the

Need for Procedural and Substantive Laws in International Arbitration

governing substance and procedure.

I. APPLICABLE 3. LEX MERCATORIA, UCP

Types of Laws Applicable to Arbitration

Scope of Substantive Laws

Determining Substantive Law

Determining Substantive Law

methods to determine the same, which are as follows:

the seat of arbitration.

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