International Commercial Arbitration: The Conflict of Laws ... · (1981); P.S. Smedresman, 'Conflict of Laws in International Commercial Arbitration: A Survey of Recent Developments

NILR 1993 201

INTERNATIONAL COMMERCIAL ARBITRATION THE CONFLICT OFLAWS ISSUES IN DETERMINING THE APPLICABLE SUBSTANTIVELAW IN THE CONTEXT OF INVESTMENT AGREEMENTS

by AFM Maniruzzaman

1 INTRODUCTION

The parties to an investment agreement ie a State or its controlled enterpriseand a foreign private entity1 often fail to reach an agreement as to the substan-tive law applicable to any dispute that may arise during the course of theircontractual relationship Sometimes such disagreement occurs owing to theconflicting interests of the parties As a distinguished jurist has aptly put it

While the host State is primarily interested in subjecting foreign investments to itsnational legal system because it wishes to retain the fullest legislative freedom inpursuance of its national economic policies the foreign investor is primarily interestedin excluding the application of the law of the host State because he fears that the hostState may use its sovereign legislative power to change the legal environment to thedetriment of his investment 2

Thus in the face of the opposing views of the parties when agreement withregard to the selection of applicable law turns out to be impossible the partiesprefer to leave the issue open so that it should be determined by the prospectivearbitrator or arbitrators in case any dispute arises in the future This explains the

Dr AFM Maniruzzaman is an international legal consultant and advocate of the SupremeCourt of Bangladesh and is currently a Visiting Scholar at the Centre of International StudiesUniversity of Cambridge UK The author expresses his gratitude to ProfessorK Lipstein EmeritusProfessor of Law Dr G Marston and Dr MA Clarke all of the Faculty of Law University ofCambridge for their helpful comments on the earlier drafts of this article

1 See generally Transnational Corporations Vol I No 1 UN Publications (1992) DCampbell ed The Transnational Person Private Rights in the International Business Community(1992)

2 G Jaenicke Consequences of a Breach of an International Agreement Governed byInternational Law by General Principles of Law or by Domestic Law of the Host State in DCDicke ed Foreign Investment in the Present and a New International Economic Order (1987)

Netherlands International Law Review XL 201-237 1993c 1993 TMC Asser Instituutand Contributors

use available at httpswwwcambridgeorgcoreterms httpsdoiorg101017S0165070X0000927XDownloaded from httpswwwcambridgeorgcore Open University Library on 23 Jan 2017 at 194546 subject to the Cambridge Core terms of

202 AFM MANIRUZZAMAN NILR 1993

reason why many of the more recent investment agreements are silent on theapplicable law clause In order to settle the dispute the arbitrator then has todischarge the difficult task of determining the law applicable to the contract Itcannot be denied that whoever whether the parties or the arbitrator determinesthe applicable law which governs an investment agreement the determinedapplicable law plays an important role in the interpretation of such an agreementand the rights and obligations of the parties flowing therefrom

The purpose of this article is to examine the different methods of conflict oflaws or private international law3 that arbitrators follow in order to determinethe proper law or applicable substantive law of a contract when the choice of lawprovision is absent in it It will be shown that there are two principal trends inthose methods that lead respectively to the theories of localization and delo-calization or denationalization of international arbitration4 The arbitratorsfreedom of will plays an important role towards such denationalization To whatextent arbitrators can exercise that freedom is a matter of some controversy Itshould be mentioned that the present study bears closely upon Article 28(2) ofthe UNCITRAL Model Law on International Commercial Arbitration (1985)5

which authorises the arbitrator to apply conflict of laws rules in determining theproper law of the contract when this has not been designated by the parties6

The Model Law is now being increasingly adopted in many developed anddeveloping countries7 On the question of choice of applicable conflict of lawsrules the discussion will try to offer some practical insights

2 THE ARBITRATORS TASK IN DETERMINING THE APPLICABLELAW

In the complete absence of an express choice of law provision by the parties8

the arbitrator is entrusted with the task of determining the proper law of the

3 In this articleconflictof lawsand private international law have been used interchangeablyso have conflict of laws and conflicts of law

4 The terms delocalization and denationalizationused in this article are interchangeable5 As adopted by the UN Commission on International Trade Law on 21 June 19856 Art 28(2) of the Model Law on International Commercial Arbitration provides that Failing

any designation (of law applicable to the substance of the dispute) by the parties the arbitral tribunalshall apply the law determined by the conflict of laws rules which it considers applicable See 2Arbitration Int (1986)p l l a tp 18 also in A RedfemmdMHunterLawandPracticeofInterna-tional Commercial Arbitration 2nd edn (1991) App 21 p 798 at p 806 pp 508-527 see alsoG Herrmann UNCITRAL Adopts Model Law on International Commercial Arbitration 2Arbitration Int (1986) p 2 G Herrmann The UNCITRAL Model Law - Its Background SalientFeatures and Purposes 1 Arbitration Int (1985) p 6

7 See Redfern and Hunter op cit n 6 at pp 525-5278 See AE Anton Private International Law (1990) pp 268-273


NILR 1993 INTERNATIONAL COMMERCIAL ARBITRATION 203

contract by following conflict of laws rules9 as he deems appropriate10 It isconsidered that in this process the arbitrator has the freedom of will to choosethe conflict rules However if the existence validity meaning or scope of choiceof law by the parties is called into question that question must be resolved byapplication of further legal rules12 In addition if no valid and complete choiceis found the arbitrator must resort to other conflict rules requiring character-ization of the matters in dispute and determination of the proper law13

In this context the question may arise whether the presence of a State or aState-controlled enterprise as one of the parties bears any special significance

9 See generally O Lando The Conflict of Laws of Contracts General Principles 189Hague Recueil (1984-VI) pp 225-448 RJ Weintraub Fundamental Developments in Choice ofLaw for Contracts 187 Hague Receil (1984-IV) pp 239-306 R David LArbitrage dans leCommerce International (1982) H Batiffol Les Contrats en droit international Prive Compare(1981) PS Smedresman Conflict of Laws in International Commercial Arbitration A Surveyof Recent Developments 7 Calif WILJ (1977) p 263

10 Rules for the International Chamber of Commerce Court of Arbitration Art 133 reprintedin 15 ILM (1976) p 395 Convention on the Settlement of Investment Disputes Between States andNationals of Other States March 18 1965 Art 421 17 UST 1270 TIAS No 6090 576 UNTS159 reprinted in 4 ILM (1965) p 532 UN Conventions on International Trade Laws (UNCITRAL)Rules of Arbitration Art 33(1) in II YB Com Arb (1977) p 161 Model Law on InternationalCommercial Arbitration (1985) Art 28(2) European Convention on International CommercialArbitration (1961) 484 UNTS 364 16 May 1961 VII (I) See also BP v Libya 53 ILR (1979)p 326See also WL Craig et al International Chamber of Commerce Arbitration 2nd edn (1990) atpp 283-292 I I Dore Arbitration and Conciliation under the UNCITRAL Rules A Textual Analysis(1986)

11 See B Goldman Les conflits de lois dans larbitrage international de droit prive 109Hague Recueil (1963-11) pp 347 409

12 See generally J Prebble Choice of Law to Determine the Validity and Effects of Contract(thesis Cornell University 1972) J Prebble Choice of Law to Determine the Validity and Effectof Contracts A Comparison of English and American Approaches to Conflict of Laws 3 CornellLR (1973) p 433 AJE Jaffey Essential Validity of Contracts in the English Conflicts of Laws23 ICLQ (1974) p 1 AJE Jaffey The English Proper Law Doctrine and the EEC Convention33 ICLQ (1984) p 531 UU Uche Conflict of Laws in a Multi-Ethnic Setting Lessons fromAnglophone Africa 228 Hague Recueil (1991-IH) p 273

13 K Lipstein International Arbitration between Individuals and Governments and the Con-flicts of Laws in B Cheng and ED Brown eds Contemporary Problems in International Law(1988) p 177 at pp 182-189 see also PA Freund Characterization with Respect to Contractsin the Conflict of Laws in Lectures on the Conflict of Laws and International Contracts (1949)at pp 158-164 AH Robertson Characterization in the Conflict of Laws (1940) A FrihagenThe Legal Characterisationof Resource Interests Does it Matter in Energy Law 88 (Proceedingsof the advanced seminar on petroleum minerals amp energy resources law organised by the IBAsSection on Energy amp Natural Resources Law in Sydney Australia March 1988) p 345 PDCameron The Legal Structure and Characterisationof a Resource Interest Does it Matter ibidp 356PA Lalive The Transfer of Chatties in the Conflict ofLaws A Comparative Study (1955)pp 1-29



Examining the recent arbitral practices an experienced arbitrator has recentlyconcluded that

In international commercial arbitration involving State enterprises the same principlesare nominally applied to solve conflict of laws as are applied in international commer-cial arbitration between private parties14

However he is mindful of the fact that only in a minority of cases and in relationto certain aspects of the dispute will additional specific criteria have to beconsidered because one party is a State or State enterprise15 This matter willbe discussed later in this article

Arbitrators have adopted a great variety of solutions to the choice of lawquestion in the absence of an express choice of law clause As mentioned earlierthe different approaches made to the conflict of laws rules have principally ledto two theories Localization and delocalization or denationalization Underthe theory of localization recourse will be had mainly to the rules of privateinternational law which lead to the application of the host States law as theproper law of the contract

14 KH Bockstiegel Arbitration andStateEnterprises (1984)p 26 See also R v Internation-al Trustee for the Protection ofBondholders Aktiengesellschaft [1937] AC where the court said in every case where a Government be a Party or not the general principle which determinesthe proper law of the contract is the same p 531 See generally P Sarievic ed InternationalContracts and Conflict of Laws (1990) A Briggs The Formation of International Contracts 2LMCLQ (May 1990) p 192

15 Bockstiegel op cit n 14 at p 23 see also Bockstiegel Arbitration between States andPrivate Enterprises in the International Chamber of Commerce 59 AJIL (1965) p 579 Panel (I)Arbitration between Governments and Foreign Private Firms Proc Am Soc Int L (April 281961)p 69 CM Spofford Third-Party Judgment and International Economic Transactions 113Hague Recueil (1964-III) p 121 FA Mann State Contracts and International Arbitration 42BYIL (1967) p 1 WT Ketcham Jr Arbitration between a State and a Foreign Private Partyin Symposium Rights and Duties ofPrivate Investors Abroad(1965) p 403 GW Ray Jr LawGoverning Contracts between States and Foreign Nationals in the 1960 Proceedings of the Instituteon Private Investment Abroad p 5 A Broches Choice of Law Provisions in Contracts withGovernments 26 Record of the Assoc of the Bar of the City of NY (1971) p 42 J-F LaliveContracts between a State or State Agency and a Foreign Company 13 ICLQ(1964)p 987 CJOlmstead Economic Development Agreements Part II Agreements between States and AliensChoiceof Law and Remedy 49 CaliforniaLR (1961) p 504 D Suratger ConsiderationsAffectingChoice-of-Law (Clauses in Contracts between Governments and Foreign Nationals 2 IJIL (1962)p 273 J Baloro The Legal Status of Concession Agreements in International Law 19 Compamp ILJ of SA (1986) p 410 MM Hassan State and International Commercial Arbitration RevueHelleniqUe (1989-1990) pp 315-339 LJ Bouchez The Prospects for International ArbitrationDisputes between States and Private Enterprises in AHA Soons ed International ArbitrationPast and Prospects (1990) with comments on it by GJ Jaenicke on p 155 KR SimmonsInternational Arbitration between States and Corporate Entities A Cautionary Note in JDMLewed Contemporary Problems in InternationalArbitration (1986) p 273P Lalive Arbitration



21 The localization theory

In the search for the objective proper law16 in the absence of an express choicean arbitrator may resort to a variety of connecting factors17 the place of theexecution of the contract18 the place of performance19 the nationality20 ordomicile21 of the debtor and the fact that one party is a State (letting in interna-tional law)22 coupled with the possibility of depeqageP

with Foreign States or State Controlled Entities Some Practical Questions ibid p 289 JPCarver The Strengths and Weaknesses of International Arbitration Involving a State as a PartyPractical Implications ibid p 264 AH Herrmann Dispute between State and Foreign Compa-nies ibid p 250 JA Westberg The Applicable Law Issue in International Business Transactionswith Government Parties - Rulings of the Iran-United States Claims Tribunal 2 ICSID Rev(1987) p 473 JR Crook Applicable Law in International Arbitration The Iran-US ClaimsTribunal Experience 83 AJIL(1989)p 278 P Eisetmnn Report on the Present Situation of Inter-national Commercial Arbitration Between State or State Enterprises (1975) (paper presented to theFifth International Arbitration Congress New Delhi) M Domke The Israeli-Soviet Oil Arbitra-tion 53 AJIL (1959) p 708 M Domke Arbitration between Governmental Bodies and ForeignPrivate Finns 17 Arbitration J (NS) (1962) p 129 A Broches Choice of Law Provision inContracts with Governments in WLM Reese ed International Contracts Choice of Law andLanguage (1962) p 64 A Boggiano Contratos Internacionales (1990)

16 Government of Kuwait v American Independent Oil Co (1984) 66 ILR 560 (6) 561 (8)GR Delaume State Contracts and Transnational Arbitration 75 AJIL (1981) p 784 at p 802

17 See generally F-E Klein The Law to be Applied by the Arbitrator to the Substance ofthe Dispute in JC Schultszand AJ van den Berg eds The Art of Arbitration (1982) p 189

18 See SPP (Middle East) Ltd et al v Arab Republic of Egypt 22 ILM (1983) p 752 atp 769 para 49 see also ICC Award (16 June 1960) Arb Rechtspraak 1960 281 (in English)Ad hoc Arb Award (15 August 1957) Arb Rechtspraak 1959 p 243 (in Dutch) Arb Courtofthe Bulgarian Chamber of Commerce Award 21561565552561656105617569566764 reported in Journalde droit international (1967) pp 171 et seq and p 175 See the FinalAward in ICC Case No 6268 of 18 May 199016 YB Comm Arb (1991) p 119 at pp 120-122

19 See SPP (Middle East) Ltd et at v Arab Republic of Egypt 22 ILM (1983) p 752 atp 769 para 49 in favour ofthe lex loci solutionis see also Petroleum Development Ltd v SheikhofAbuDhabi (1951) 18 ILR p 144 ICC Arbitration No 1472 Award 196SinRevue delarbitrage(1973) p 141Seealso Foreign Trade ArbitrationCommission Moscow Award 4 May 1957 NectonSA (Belgium)v Prodintorg Collected Arbitration cases FTAC No 61 also in Journal du droit international(1960) p 880 see also Collected Arbitration Cases FTAC (4 vols covering 1934-1965) Nos 1829 34 36 40 44-46 50 52-54 56 60 62 68 75-78 125 131See the Interim Award in ICC Case No 6560 of 1990 17 YB Comm Arb (1992) pp 226-229see also the Final Award in ICC Case No 6283 of 1990 17 YB Comm Arb (1992) p 178 atp 179

20 See the Interim Award in ICC Case No 6560 of 1990 17 YB Comm Arb (1992) pp226-229 see also the Final Award in ICC Case No 6283 of 1990 17 YB Comm Arb (1992) p178 at p 179

21 See the Final Award in ICC Case No 5885 of 1989 16 YB Comm Arb (1991) p 92see also the Hague Convention on the Law Applicable to International Sales (1955) Art 3(1)

22 ICSID Convention of 1965 Art 42(1)



Some authorities suggest that arbitrators should apply the rules of choice oflaw of the forum which the parties have designated for their arbitration This isknown as the theory of the lexfori Under this theory a contending host Statecan possibly ensure the application of its own law if it can make the private partyagree to insert provisions for arbitration to take place within its own jurisdic-tion24 As Rapporteur of the Institut de Droit International Professor Sauser-Hall advocated that arbitrators and arbitral parties choice of applicable lawshould be governed by the conflict of laws system of the forum of arbitrationIn the absence of choice of law by the parties the arbitrator must apply theconflict rules of the tribunals forum or seat This approach was also reflectedin Article 11 of the Resolution adopted by the Institut at its 1957 session inAmsterdam It provided as follows

The rules of choice of law in force in the State of the seat of the arbitral tribunal mustbe followed to settle the law applicable to the substance of the difference Within thelimits of such law arbitrators shall apply the law chosen by the parties or in defaultof any express indication by them shall determine what is the will of the parties inthis respect having regard to all the circumstances of the caseIf the law of the place of the seat of the arbitral tribunal so authorises them the partiesmay give the arbitrators power to decide ex aequo et bono or according to the rulesof professional bodies (emphasis added)25

Later in 1959 the Instituts Neuchatel session also endorsed this view26 Mannwas a strong proponent of this theory In his view every right or power a privateperson enjoys is inexorably conferred by or derived from a system of municipallaw which may conveniently and in accordance with tradition be called the lex

23 Sapphire International Petroleum Ltd v National Iranian Oil Co (1963) 35 ILR p 171Saudi Arabia v Arabian American Oil Co (1959) 27 ILR p 165 at p 166 Revere Copper andBrass Inc v Overseas Privatelnt Corp (1978) 56 ILR p 294 for other possibilities see 18 IntLawyer (1984) p 245 at pp 255-256 Ann IDI (1979-11) p 281 Arts 1 and 2WLM Reese Depacage A Common Phenomenon in Choice of Law 73 Columbia LR (1973)p 58 Depecage can be defined broadly to cover all situations where the rules of different Statesare applied to govern different issues in the same case It can be defined more narrowly to bepresent only when the rules of different States are applied to govern different substantive issuesand most restrictive definitions would confine the term to situations where by applying the rulesof different States to different issues a result is reached which could not be obtained by exclusiveapplication of the law of any one of the States concerned

24 See Dicey and Morris on the Conflict of Laws 10th edn (1980) vol 2 at p 1127 DMSassoon Choice of Tribunal and the Proper Law of the Contract J Bus L (1964) p 18 LCollins Arbitration Clauses and Forum Selecting Clauses in the Conflict of Laws Some RecentDevelopments in England 2 J Mar L amp Comm (1971) p 363

25 47(2) Ann IDI (1957) p 491 at p 49626 See 48(2) Ann IDI (1959) at p 264



fori 27 Arbitrators may follow this traditional approach28 though they are notbound to do so29 in the sense that an arbitrator is not to be labelled as a nationaljudge30 who is compelled to follow the rules of conflict of laws of the forum31

we shall shortly turn to this issue Critics of the traditional approach suggestedthat not too much importance should be given to the accountability of the lawof the forum of arbitration in view of the fact that sometimes the disputeconcerned may not have in reality any genuine connection with the forum Thechoice of forum may be a matter of convenience and not a matter of connec-tion32 The most important objection relates to the totally accidental characterof such forum in cases where it has not been fixed in advance by the parties tothe arbitration clause or agreement It has been remarked thus

27 FA Mann The Theoretical Approach Towards the Law Governing Contracts betweenStates and Private Foreign Persons 11 Revue Beige (1975) p 562 at p 565 See also Mann LexFacit Arbitrum in P Sanders ed International Arbitration Liber Amicorum for Martin Domke(1967) p 157 at pp 159-160 See the observations of Mann in 63(1) Ann IDI (1989) p 173 RHGraveson Conflict of Laws 7th edn (1974) p 57 But see The UNCITRAL Model Law - LexFacit Arbitrum - The Notes Editors 2 Arbitration Int (1986) no 3 pp 241-261

28 In many awards arbitrators relied on the rules of lex fori See for instance the Sapphireaward 35 ILR at p 171 Alsing Trading Co Ltd and Svenska Tandsticks Aktiebolaget v Greece(Award of 22 December 1954) 23 ILR p 633 at p 637 Cf BP v Libya 53 ILR p 309 atpp 326-27 The Government of Kuwait v Aminoil 66 ILR at p 560

29 In the Economic Commission for Europe (ECE) the negotiatorsof the European Conventionon International Commercial Arbitration 1961 rejected the Instituts position and adopted analternative approach that has gained a wide following According to the Convention arbitrators havewide discretion as to the applicable conflict of laws to determine the proper law when such aprovision to this effect is absent in the contract See Art VII(I) of the European Convention on Inter-national Commercial Arbitration 1961484 UNTS 364 reprinted in C Brower and L Marks edsInternational Commercial Arbitration (1983) p 215 See also Art 13(3) of the ICC ArbitrationRules 28 ILM (1989) p 231 Art 33 of the UNCITRAL Arbitration Rules and Art 28 ofUNCITRALs 1985 Model Law on International Commercial Arbitration 15 ILM (1976) p 701and 24 ILM (1985) at p 1302 respectively

30 Batiffol has stressed the contrast between State judges who are bound by the conflict rulesof their State and international arbitrators who are not rendering justice in the name of any StateSee H Batiffol Larbitrage et les conflits de lois Revue de Varbitrage (1957) p Ill ICC AwardNo 1250 of May 1954 5 YB Comm Arb (1980) p 168 see also Holleaux in Revue de I arbitrage(1964)p 134KS Carlston PsychologicalandSociologicalAspectsoftheJudicialand ArbitrationProcesses in Sanders ed op cit n 27 p 44 IND Wallace QC Control by the CourtsA Plea for More Not Less 6 Arbitration Int (1990) no 3 p 253

31 See the Kuwait v Aminoil arbitration case Aminoil Counter-Memorial (5 January 1981)vol I (Text) Pleadings Book 4 pp 103-111 para 226 et seq [The Pleadings are available atthe Research Centre for International Law University of Cambridge UK]

32 SeeK-HB6ckstiegclThe Legal Rules Applicable in International Commercial ArbitrationInvolving States or State-ControlledEnterprises (19amp2) p 52 J Lew Applicable Law in Internation-al Commercial Arbitration (1978) pp 252-253 see also YAM Nusaire International Arbitrationthe Place and the Stages of Arbitration (thesis CPMLS University of Dundee 1987)



It does not seem permissible to determine the applicable substantive law of the contracton the basis of the lexfori of that seat of arbitration because that would mean thatthe parties - not knowing of course which seat might be determined later - wouldhave no possibility of finding out the applicable substantive law while performing thecontractgt33

Here our main concern is to examine whether the conflict rules sometimes appliedby arbitrators34 and as found in the private international law legislation in mostStates lead to the application of the host States law to an investment agreementThere is no denying that in the search for the objective proper law the law ofthe place of contracting and of performance appear to have had some supportin practice35

One of the important rules in private international law as to the choice of lawis the principle of most significant relationship That is to say when there is noexplicit expression of the governing law or proper law in a contract the properlaw of the contract shall be that with which the transaction has its closest andmost real connection36 Thus the search is not for the State but for the systemof law with which the contract has the closest connection37 The rule dates backto the 1890s when it was accepted in favour of Westlake amidst the long-standingacademic battle between him and Dicey This theory has slowly spread roundthe world being advocated by Batiffol in 1938 under the name of the localiza-tion theory This is what a Resolution of the Institut de Droit Internationalconfirmed more than a decade ago38 The Resolution reads inter alia asfollows

33 Bockstiegel op cit n 14 at p 2734 SPP (Middle East) Ltd et al v Arab Republic of Egypt 22 ILM (1983) p 752 at p

769 para 49 Cf ICC Arbitration award 16 June 1960 Arb Rechtspraak 1960 p 281 (inEnglish) Ad hoc Arbitration award 15 August 1957 Arb Rechtspraak 1959 p 243 (in Dutch)Arbitration court of the Bulgarian chamber of commerce awards 2156 156555256 165610561756 956 6764 as reported by Kojouharoff in Journal du droit international (1967) p171 et seq and p 175 Foreign Trade Arbitration Commission Moscow Award of 4 May 1957NectionSA (Belgium)) Prodintorg see Collected Arbitration cases FT AC No 61 also publishedin Journal du droit international (1960) p 880 see Collected Arbitration cases FT AC (four volscovering 1934-1965) Nos 18 29 34 36 40 44-46 50 52-54 56 60 62 68 75-78 125 131ICC Arb No 1472 Award 1968 see Revue de Varbitrage (1973) p 141 see also K HoberArbitration in Moscow 3 Arbitration Int (1987) no 2 pp 119-163

35 See Saudi Arabia v Aramco (1959) 27 ILR p 117 at pp 166 167 Petroleum Develop-ment Ltd v Sheikh ofAbu Dhabi (1951) 18 ILR p 144atp 149seealso Kuwait v Aminoilthe Governments Memorial (May 1980) Pleadings Bk 3 paras 335-337 at pp 59-60

36 This is also known as the Centre of gravity or most significant contacts theory of thecontract conflict of laws

37 MA Clarke The Law of Insurance Contracts (1989) at p 2338 The Resolution The Proper Law of the Contract in Agreements between a State and a

Foreign Private Person of the Institut de Droit International (adopted by the Institut at its AthensSession September 4-13 1979) 58 Ann IDI (1979) pp 193 195 (Arts 1 and 5)



Article 1 Contracts between a State and a foreign private person shall be subjectedto the rules of law chosen by the parties or failing such a choice to the rules of lawwith which the contract has the closest linkArticle 5 In the absence of any choice by the parties the proper law of the contractshall be derived from indications of the closest connection of the contract (emphasisadded)39

In the same vein Denning LJ (as he then was) ruled on the matter in Boissevain

v Wei0 as follows

The proper law of the contract depends not so much on the place where it is madenot even on the intention of the parties or on the place where it is to be performedbut on the place with which it has the most substantial connection (emphasis added)

Later in 1961 Lord Denning then in the House of Lords said straight-forwardly in the absence of an express clause the test is simply with whatcountry has the transaction the closest and most real connection 41

Lord Simmonds also pronounced the judicial definition of the proper law inthe leading case Bonython v Commonwealth of Australia1 that the system oflaw by reference to which the contract was made or that with which the trans-action has its closest and most real connection

Thus in English law the closest connection or closest link is known as theproper law test43 Also Article 4(1) of the Rome Convention on the Law Appli-cable to Contractual Obligations provides that

39 Idem40 [1949] 1 KB p 482 at pp 490 49141 In re United Railways ofHavanaA Reg la Warehouses Ltd [1961] AC p 1007atp 106842 [1951] AC 201 219 see also Tomkinson v First Pennsylvania Banking and Trust Co

[1961] AC 1007 Rossano v Manufacturers Life Insurance Co Ltd [1963] 2 QB 352 per Mc-Nair J

43 FA Mann The Proper Law of the Conflicts of Law 36 ICLQ (1987) p 437 at pp437-438 The expression the proper law is peculiarto the law of England and the CommonwealthIt does not seem to be usual in the United States and it means little if anything to a Continentallawyer for it makes sense only in an uncodified system of law Taken literally the term simplydenotes the appropriate legal system It says nothing about the all-important question how you findthat system how you identify it There is however room for the impression that if you ask anEnglish lawyer for a definition he will go a little further and mention the legal system with whichthe matter in issue is closely or perhaps most closely connected John Morris certainly used thephrase in this senseSee alsoDjcey and Morris on The Conflict of Lam vol 21 lth edn (1987) pp 1190-1197 Whenthe intention of the parties to a contract with regard to the law governing it is not expressed andcannot be inferred from the circumstances the contract is governed by the system of law with whichthe transaction has its closest and most real connection Rule 145 sub-rule 3 ibid RH GravesonThe Proper Law of Commercial Contracts as Developed in the English Legal System in Lectures



To the extent that the law applicable to the contract has not been chosen in accordancewith Article 3 the contract shall be governed by the law of the country with whichit is most closely connectedgt44

The second restatement of Conflict of Laws of the United States of America1971 provides this principle in Section 18845 The Uniform Commercial Codeof the United States of America 1978 also produces this result (Section1-105)46 The Foreign Economic Contract Law (1985) of the Peoples Republicof China provides in the same way where parties fail to make a choicethe law that is the most closely related to the contract shall apply47

on the Conflict of Laws and International Contracts (1949) Summer Institute on International andComparative Law University of Michigan Law School (1951) pp 1-33 PB Carter Contract inEnglish Private International Law 57 BYIL (1986) p 1 P North Private International LawProblems in Common Law Jurisdictions (1993) p 103 et seq

44 80934EEC Official Journal of the European Communities (1980) L 266 The Conventionentered into force on 1 April 1991 in France Italy Denmark Luxembourg Greece GermanyBelgium and the UK ibid (1991) C 521 See also generally R Plender The European ContractsConvention The Rome Convention on the Choice of Law for Contracts (1991) P M North ContractConflicts (1982) E Jayme The Rome Convention on the Law Applicable to Contractual Obligations(1980) in Sarcevic ed op cit n 14 p 36

45 Restatement (2nd) S 188 (1971) See also R Leflar American Conflicts Law 3rd edn(1977) pp 306-309P Wood Law and Practice ofInternational Finance (1980) p 12 RecentNewYork cases have followed the rule that a contractual provision setting forth the law applicable tothe agreement in question will be followed so long as the transaction bears a reasonable relationshipto the law chosen or more precisely stated to the jurisdiction whose law is chosen SeelS RampellInc v Hyster Co 3 NY 2d 369 144 NE 2d 371 165 NYS 2d 475 (1957) Reger v NatlAssn of Bedding Manufacturers Group Insurance Trust Fund 83 Misc 2d 327 372 NYS 2d97 (Sup Ct Westchester County 1975) Fleischmam Distilling Corp v Distillers Co Ltd 395F Supp 221 (SDNY 1975) BM Heede Inc v West India Machinery and Supply Co 272 FSupp 236 (SDNY 1967) General Electric Co v Masters Mail Order Co 244 F 2d 681 (2dCir) Cert denied 355 US 824 (1957) See generally M Gruson Governing Law Clauses inCommercial Agreements - New Yorks Approach 18 Columbia JTL (1979) p 323

46 Uniform Commercial Code - 1978 Official Text The American Law Institute NationalConference of Commissioners on Uniform State Laws (1980) at p 8 See also Comment TheUniform Commercial Code and Conflict of Laws 9 AJCL (1960) p 458 RK Cullen Conflictof Laws Problems Under the Uniform Commercial Code 48 KYLJ (1960) p 417 B Katzenbachin WD Malcolm Panel Discussion on the Uniform Commercial Code 12 Business L (1956)p 49 at p 68 RJ Nordstrom Choice of Law and the Uniform Commercial Code 24 Ohio StLJ (1963) p 364 RJ Nordstrom and DB Ramerman The Uniform Commercial Code and theChoice of Law Duke LJ (1969) p 623 M Rheinstein Conflict of Laws in the Uniform Com-mercial Code 16 Law amp Comp Prob (1951) p 114 DJ Tuchler Boundaries to Party Autonomyin the Uniform Commercial Code A Radical View 11 St Louis ULJ (1967) p 180

47 The Foreign Economic Contract Law of the Peoples Republic of China (Art 5) adoptedby the 10th session of the Standing Committee of the Sixth National Peoples Congress on March21 1985 State Council Bulletin No 9 at p 217 reprinted and translated in 12 China Bus Rev(1985) No 4 pp 54-55 See also H Zheng A Comparative Analysis of the Foreign EconomicContract Law of the Peoples Pepublic of China 4 China LR (1986) p 227 also Recent



The test is sometimes described as the converging connecting factors test48

Such a description is found in international arbitral practice An internationalarbitrator may apply this test in order to avoid a rigid conflict of laws rule Whileapplying the test the arbitrator aims at the substantive law pointed to by thepreponderant number of or what he considers the most important connectingfactors49 Thus amongst the connecting factors he takes into account the lawof the place of contracting the law of the place where the subject-matter issituated the law of the place of different transactions the law of the place wherethe principal has his main business establishment and after he decides to whichmost connecting factors point he then applies the law of that country Thus forinstance in an award50 by the Arbitration Court Chamber of CommerceBudapest it was observed that the contract was concluded at the defendantsdomicile Pakistan The place of performance was also Pakistan Payment of thepurchase price was also effected in Pakistan In consequence the connectingprinciples generally recognized in private international law (lex loci contractuslex loci executionis lex loci solutionis) pointed unanimously to the fact thatPakistani law should be applied to the contract As a result of such considerationthe Arbitration Court held that the dispute which had arisen should be decidedaccording to the substantive law valid in Pakistan In another ICC case thetribunal held after weighing a number of factors argued by the parties that theplace of destination of the goods the place of payment and the nationality of thebuyers were all France and therefore French law was the proper law of thecontract The tribanal said

Developments in the Foreign Economic Contract Law of the Peoples Republic of China 13 WorldCompetition Law amp Econ Rev (1989) p 106 JL de Lisle Foreign Investment ForeignEconomic Contract Law 27 Harvard Int LJ (1986) p 275 see also generally PB Potter TheEconomic Contract Law of China Legitimation and Contract Autonomy in the PRC (1992)

48 See the Interim Award in ICC Case No 6560 of 1990 17 YB Comm Arb (1992) p 226at p 227 see also the Final Award in ICC Case No 6283 of 1990 17 YB Comm Arb (1992)p 178 at p 179

49 See the Final Award in ICC Case No 6363 of 1991 17 YB Comm Arb (1992) p 186at pp 190-191

50 Award 1961 No Vb 1024 cited by Mora in Questions of International Law (1964) p 141See also ICC Award No 805 Doc No 41081 24 October 1951 ICC Award No 1001 DocNo 410777 12 October 1960 ICC Award No 1005 Doc No 410592 10 April 1958 ICCAward No 1846 Doc No 4101953 24 February 1971 ICC Award No 1177 Doc No410161413 March 1968 ICC Award No 1445 Doc No 410149218 January 1967 ICC AwardNo 1009 Doc No 410514 13 November 1957 ICC Award No 1442 Doc No 4101665 25September 1968 ICC Award No 1082 Doc No 410744 15 June 1960 ICC Award No 1687Doc No 410 185510 June 1970 ICC Award No 1529 Doc No 4101658 10 July 1968 ICCAward No 1717 (1972)

51 See the Interim Award in ICC Case No 6560 of 1990 17 YB Comm Arb (1992) p 226



in my view the destination of the goods the nationality of the buyers and theplace for payment of the price of the goods are factors which can and should be givenindividual weight (though the amount to be attributed to each may not be verysubstantial) It is common to find goods being sold to a national of one country fordelivery to another with payment being effected in a third Here a single country (ieFrance) linked these matters Taken together it seems to me that these indicia faroutweigh the considerably more technical and accidental considerations upon whichthe claimants relied and lead inevitably to the conclusion that the proper law of thiscontract is French law52

Lew thus remarks this development is due to the movement away from rigidconflict of laws presumptions towards a more flexible and realistic conflict oflaws methodology53

While applying the test whether it is called the closest link or the convergingconnecting factors test to an investment agreement it may be found that mostof the connecting factors lie with the host State Generally the seat of the subjectmatter of the contract loci contractus5 and loci solutionis55 seat of theofferer56 seat of the place where the enterprise is established and the seat ofbusiness etc are within the territory of the host State57 It has been rightlyobserved that

52 Ibid at p 22953 Lew op cit n 32 p 34254 Soviet Union Civil Code (1964) Art 566 Statute of Japan (Private International Law) Art

7(2) T Sawada Practice of Arbitration Institutions in Japan 4 Arbitration Int (1988) No2 p120 Thailand Private International Law Art 13 Czechoslovakia Private International Law andInternational Civil Procedural Law Art 10(3) Bustamante Code Art 186 Poland Code on PrivateInternational Law Art 29

55 H Batiffol Private International Law (1970-1971) Graveson op cit n 27 p 418Thailand Private International Law Art 13

56 The former German Democratic Republic The Act Concerning the Law Applicable toInternational Private Family and Labour Law Relationships as well as to International CommercialContracts Art 12(2)

57 J Cherian International Contracts and Arbitration (1975) p 22 MH ArsanjaniInternational Regulation of Internal Resources (1981) p 200 When different rules of conflict allpoint to the same applicable law the arbitrator is inclined to consider a choice as superfluous Seealso K Ramazani Choice-of-Law Problems and International Oil Contracts A Case Study 11ICLQ (1962) p 503 who observed in the context of the oil contract concluded between the NationalIranian Oil Company and the Pan American International Oil Company that the applicationof the (objective) tests of sovereignty nationality of the agent the place of contracting and the placeof performance would indicate that the applicable law is Iranian Law Furthermore other tests suchas the nature of the subject-matter and the place where it is situated lex loci rei sitae would alsoindicate the same because the subject-matter is Iranian Petroleum located within the Iranian domain(p 509)



In most cases at least where the investment involved relates to the exploitation ofmineral or other resources in the territories of the host country all connecting factorspoint to the applicability of the law of the host State Whether that law should beapplied as lex loci contractus or lex loci solutionis is in fact irrelevantgt58

Thus to the extent that the contract is primarily concerned with transactionswhich to a greater or lesser degree are to be performed in the territorial domainof the State party the law of the State party normally governs the relationshipwhen the closest link test is applied in the absence of any choice of law provisionApart from mining concessions including oil concessions it also happens to bethe case with construction and management contracts59 turnkey contracts60

licensing agreements concerning transfer of technology61 or some other typesof licensing agreements62

211 Application of the host States law subjectivist v objectivist approach

It has already been seen that the host States law may apply as a matter ofobjective consideration derived from the closest connectionmost significantrelationship or the converging connecting factors test of conflict of laws Therealso remains on the other hand the sole inclination of some jurists towards thesubjectivist approach which leads to the presumption of the application of thelaw of the State party to the contract For the authority lying behind this

58 GR Delaume Convention on the Settlement of Investment Disputes Between States andNationals of Other States 1 Int Lawyer (1966) p 64 at p 78 to this effect see in a recentarbitration WintershallAG v Government of Qatar 28 ILM (1989) p 795 et seq

59 G Westring Construction and Management Contracts in N Horn and C Schmitthoffeds 2 The Transnational Law of International Commercial Transactions (1982) p 175 at pp181-183 M Davis Choice of Applicable Law in International Construction Contracts in J Uffand E Jones eds International and ICC Arbitration (1990) pp 213-227

60 WW Oberreit Turnkey Contracts and War WhoseRisk in Horn and Schmitthoff edsop cit n 59 pp 191-196

61 D Plaff International Licensing Contracts Transfer of Technology and TransnationalLaw in Horn and Schmitthoff eds op cit n 59 pp 199 208-209 see also Licensing Guidefor Developing Countries (World Intellectual Property Organization No 620E 1977) p 635 JKasto International Law of Technology (1992) M Blakeney Legal Aspects of the Transfer ofTechnology to Developing Countries(l989)GN Mudenda The Development of the Mining Industryin Zambia A Study in the Transfer of Technology (thesis University of Sussex 1984) G Oldhamet al Technology Transfer to the Chinese Offshore Oil Industry (1988) SPRU Occasional Papersno 27 M Kassim-Momodu Transfer of Technology in the Petroleum Industry the NigerianExperience 22 JWT (1988) no 4 pp 51-66

62 See eg ICC Award 16 June 1960 GM Brumbaugh Choice-of-Law Provisions inLicensing Contracts in Reese ed op cit n 15 pp 36-43



approach recourse is often had to the Serbian dictum63 There are also somejurists who support this position64 But such a presumption is counter-productiveThus in the Kuwait v Aminoil arbitration case Aminoil argued as follows

The old dictum of the Serbian Loans Case always of doubtful value in the particularcase of loan contracts can hardly be relied upon as representing modern law andpractice In long-term investment contracts mdash such as oil concession agreements- there can be no such presumption Indeed the presumption if any should be theother way round for common sense and experience show that no private party to along-term contract with a State can be presumed to have implicitly accepted the lawof the State as the proper law with the obvious risks following therefrom65

However there is no denying that the application of the host States law to aninvestment agreement results from both the subjectivist and objectivist approachesof conflict of laws66 It is interesting to note that the modern arbitral practice

63 See the Serbian Loans case PCIJ Series A Nos 2021 (1929) see also MessageriesMaritimes case Arret de la Cour de Cassation Ch Civ 21 Juin 1950 D 1951 p 749 TheGovernment of Kuwait in Kuwait v Aminoil stated in its Memorial that there was a strongpresumption not only in French law but also in other legal systems too including public internationallaw that where a State is a party to a contract the law of that State is the proper law of thecontract See the Governments Memorial (May 1980) Pleadings Bk 3 para 337 at p 60 seealso the Governments Reply (April 1981) Pleadings Bk 9 paras 240-241 paras 242-254at p 22 pp 23-27

64 See Mann in Revue Beige loc cit n 27 at p 564 The rule that in looking for the properlaw of transactions with States very great though by no means overriding weight has to be givento the character of the State party is universal supported by common sense and applicable tolegislative instruments with particular force See also in Mann Further Studies in InternationalLaw (1990) p 264 at p 266 M Sornarajah The Pursuit of Nationalized Property (1986) p 103G Schwarzenberger Foreign Investments and International Law (1969) p 5 SchwarzenbergerandDelaume have argued that a sovereign State cannot be presumed to have subjected a contract to whichit is a party to any legal system other than its own G Schwarzenberger The Arbitration Patternand the Protection of Property Abroad in Sanders ed op cit n 27 pp 317-318 G DelaumeTransnational Contracts Applicable Law and Settlement of Disputes re-issue (1985) vol 2 Ch14 JDM Lew Applicable Law in International Commercial Arbitration (1978) pp 348-349 Ininternational law it is beyond question that a sovereign State is entitled to regulate the rights pursuantto and the conditions of investment within its territory A person investing in a foreign country doesso knowing he is subject to the laws of that country he accepts the laws of the country of investmentas regulating the taxation payable and his right to remit to his own country the benefits of itsinvestment he also accepts the risk mdash as he does in his own country mdash of changes which may occurin government and the policy towards foreign investors and their property

65 See Aminoil Counter-Memorial (5 January 1981) vol I (Text) Pleadings Bk 4 para240 at p 109

66 See Lalive loc cit n 15 p 987 at p 993 As is well-known to both the Anglo-Americanand Civil law systems according to the objectivist theory the proper law is that of the countrywith which the contract has the most real connection while under the subjectivist theory it iscontended that the applicable law is that to which the parties intended or may fairly be presumedto submit themselves See also RK Ramazani Choice-of-Law Problems and International Oil



is more inclined to support the view that in the absence of a choice of law clausein an investment agreement the law of the State party applies more as an objectiveconsideration However if for some reason or other the objectivist approach doesnot lead to the application of the host States law then the subjectivist approachremains important as far as the State party is concerned67

22 The delocalization theory

In modern arbitral practice the trend towards the delocalization or denatio-nalization of conflict rules hence international arbitration may be noticed in thepractice of arbitrators As mentioned earlier an arbitrator unlike a judge of anational court derives his authority from a contractual arrangement between theparties and the mechanical relation between the arbitrator and a national conflictof laws today does not arise because arbitration is an independent and autonomousinstitution68 Under the contractual and autonomous theories of internationalarbitration an international arbitrator is considered to have no lexfori69 Thisconviction has led modern arbitrators increasingly towards the trend to detachinternational commercial arbitration as far as possible from any national law

Thus Goldman has advocated the development of some supra-national privateinternational law rules such as would obviate the problem of resorting to the

Contracts A Case Study 11 ICLQ (1962) p 503 at p 505 Concerning the two theories seeEJ Cohn The Objectivist Practice on the Proper Law of Contracts 6 ICLQ (1957) p 373 etseq Chesires International Contracts (1948) FA Mann The Proper Law of a Contract aReply 3 ICLQ (1950) p 197 also Mann England Rejects Delocalised Contracts and Arbitrati-on 33 ICLQ (1984) p 193 at p 194 (t)he search for the proper law impliedly chosen ie aproper process of construction will almost invariably render it unnecessary to resort to ViscountSimondss deceptive formula (in Bonythonv Commonwealth ofAustralia [1951] AC 201 219 thesystem of law by reference to which the contract was made or that with which the transaction hasits closest and most real connection) - deceptive because the search for the closest and most realconnection is in essence nothing else than the search for the implied term See also Jaffey in ICLQ(1984) loc cit n 12 p 531 at p 545

67 Sometimes the State or its controlled enterprise is mandatorily required by law to contractby reference to its own law for instance in Saudi Arabia This will probably be an advantage forthe State contracting party See Bockstiegel op cit n 14 at pp 29-30 M Sornarajah The Pursuitof Nationalized Property (1986) p 103

68 See J Paulsson Delocalization of International Commercial Arbitration When and Whyit Matters 32 ICLQ (1983) p 53

69 See generally A- Samuel JurisdictionalProblems in International Commercial Arbitration(1989) Ch 1 HP de Vries International Commercial Arbitration A Traditional View 1 J IntArb (1984) p 7 AT von Mehren To What Extent is International Commercial ArbitrationAutonomous in LeDroit des Relations Economiques Internationales Etudes Offerts a B Goldman(1982)p217JRubelin-DevichiL arbitrage Nature Juridique droit interne et droit internationalprive (1965) para 584 at p 365 DB Straus The Growing Consensus on InternationalCommercial Arbitration 68 AJIL (1974) p 709 Cf Kuwait v Aminoil The GovernmentsMemorial (December 1980) Pleadings Bk 5 paras 339-342 pp 67-69


216 AFM MANIRUZZAMAN M L R 1993

private international law rules of the siege of the tribunal or the nationality ofthe arbitrators70 The move towards delocalization of international arbitrationhas gained support in the legal literature as well as in arbitral practice As onearbitration lawyer has noted

In recent years it has become fashionable to seek to detach internationalcommercialarbitrations from the control of the law of the place in which they are held Suchdetached arbitrations go by many names They may be called supra-national ora-national or transnational or even ex-patriate They may be called de-national-ized or de-localized More poetically they are also referred to as floatingarbitrations which result in floating awards 71

But the question still remains whether there is any truly detached or floatingarbitration or award72

The trends toward the delocalization of international arbitration will now beexamined

3 THE ARBITRATORS FREEDOM TO ESTABLISH CONFLICT OFLAWS RULES

As a party-appointed judge there is no doubt that an arbitrator enjoys sufficientfreedom to decide which conflict of laws rules he should apply in order todetermine the law applicable to the merits of the case taking all relevant circum-stances into account This freedom of the arbitrator appears as an important factorin the process of denationalization of arbitration The logic behind the partieschoosing an international arbitration instead of a national court for the settlementof their disputes may be that one or either of them may not be satisfied with therigidity of a national court in the matters of conflict of laws and as well as theoverall settlement of the dispute Thus in the expectation of a future friendlybusiness relationship the parties mutually expect to settle their dispute amicablywhich calls for a more flexible approach than that of a national court73 Asmentioned earlier the arbitrators freedom to select his own conflict of laws ruleshas also been formally recognized in many international legal instruments74

70 Goldman loc cit n 11 p 35171 A Redfern The Arbitration Between the Government of Kuwait and AminoiP 55 BYIL

(1984) p 65 at p 7772 See generally Mann in ICLQ (1984) loc cit n 66 p 19373 See also C Shaikh Proposed New Approach to Resolving Disputes in the Oil Industry

8 Oil amp Gas L and Taxation Rev (1990) no 5 pp 119-12074 Art VII(l)ofthel961 European Convention on International Commercial Arbitration Art

33(1) of the UNCITRAL Arbitration Rules Art 13(3) of the Rules of the ICC Court of Arbitrationand Art 28(2) of the 1985 UNCITRAL Model Law reproduced in Y Derains Public Policy and



In the BP Award Sole Arbitrator Lagergren also supported this approach ashe said

If the parties to the agreement have not provided otherwise such an arbitral tribunalis at liberty to choose the conflict of laws rules that it deems applicable having regardto all the circumstances of the case75

The arbitrators free choice should not be flawed by arbitrariness Rather heshould ensure the best possible choice in the circumstances In an ICC Award76

the arbitrator had this to say

Si les arbitrespeuventmettreenlumiereque sur le point souleve les regies de conflitdes diffdrents Etats avec lesquels le litige qui leur est soumis a des liens sont de lameme teneur ou conduisent au meme resultat ils sont habilites a appliquer les regiesde conflit commun 6tant ainsi certains de satisfaire lintention implicite ou supposeedes parties dont ils recoivent leur pouvoir

In another ICC arbitral Award in a dispute between a Bulgarian State enterpriseand a Swiss buyer the arbitrator held that in this matter [the applicable law]the arbitrators consider that it would be proper to apply Swiss private interna-tional law77 The special characteristic of the case was that the arbitration itselfas well as the activities under the contract were connected with several countriesThus France was the seat of arbitration Bulgaria was the State of nationalityof the seller and the place where the contract was concluded Switzerland wasthe State of nationality of the buyer Egypt was the place where the contract wasto be performed and Sweden was the State of nationality of the arbitratorHowever the arbitrator decided to apply Swiss private international law whichled to the application of Bulgarian law because it was the most appropriate forthe case at hand The arbitrator avoided giving any reasoned explanation for thatchoice

In an arbitral Award under ICC78 auspices the arbitrator found

Considerant que 1 insertion dans un contrat ay ant des liens de fait avec plusieurs Etatsdune clause compromissoire confiant la solution des differends qui auraient resulte

the Law Applicable to the Dispute in International Arbitration in P Sanders ed ComparativeArbitration Practice and Public Policy in Arbitration (1987) p 226 at pp 230-232 see also Art1496 of the French Code of Civil Procedure 1981 and Art 12 of the Djibouti Code on InternationalArbitration 1984 The New York Convention of 10 June 1958 on the Recognition and Enforcementof Foreign Arbitration Awards also impliedly confirms the arbitrators discretion in this field

75 BP v Libya 53 ILR at p 32676 ICC Arbitration No 1776 Award 197077 ICC Award No 1048 Doc No 410802 11 January 196078 See Goldman loc cit n 11 p 409



dudit contrat a larbitrage dune institution internationale telle que la Chambre decommerce internationale exprime la volonte des parties de placer leur litige sur unplan international et de le faire trancher par un arbitrage vraiment international sederoulant au-dessus de tout ordre juridique nationalConsiderant quen pareil cas larbitre pour resoudre le probleme des conflits de loiinherent a cette sorte de litige et pour determiner le droit substantiel au contrat encause doit tout dabord chercher la volonte expresse ou tacite des partiesConsiderant que faute dune pareille volonte larbitre doit statuant ex aequo et bonodeclarer applicable la loi qui compte tenu des elements objectifs et des circonstancesparticulieres des cas litigieux convient le mieux au contrat

It is thus clear that an international arbitrator may exercise great freedom in thematter of applicable law However he exercises such freedom in the way hethinks most appropriate under the practical circumstances of the case

In the BP Award79 Sole Arbitrator Lagergren decided to apply Danishconflict of laws rules not because they were the lex loci arbitri0 but becauseas a matter of fact he considered that they were convenient in view of thearbitrations close connection with Danish law which would ensure the effective-ness of the award bearing a national character as such81 Further Danish ruleswere likely to give effect to the intentions of the parties since they containedfew restrictions upon the freedom of contracting parties to select the proper lawof their agreement Thus in choosing the Danish conflict rules the arbitrator

79 BP v Libya 53 ILR at p 32680 A Hirsch The Place of Arbitration and the Lex Arbitri 34 Arbitration J (1979) no 1

pp 43-48 Lew op cit n 64 at pp 260-272 See generally A Samuel The Effect of the Placeof Arbitration on the Enforcement of the Agreement to Arbitrate 8 Arbitration Int (1992) no3 pp 257-280 WW Park The Lex Loci Arbitri and International Commercial Arbitration 32ICLQ (1983) p 21 See the Final Award in ICC Case No 6268 of 18 May 1990 16 YB CommArb (1991) p 119 at p 121 Cf Kuwait v Aminoil arbitration case the Governments Counter-Memorial paras 321319-320 contra the AminoilReply (27 April 1981) Plead ings Bk 7 paras33-34 40(b) 45

81 The arbitrator exercised his discretionary authority by selecting the law of the seat ofarbitration (in that case Denmark) as the law applicable to the arbitral procedure He apparentlyconsidered that an advantage of localizing the law in this way was that enforcement would befacilitated since the award made under the law of a contracting State would fall within the termsof the Convention on Enforcement of Foreign Arbitral Awards of 1958 (the so-called New YorkConvention) Attaching the award to the law of a particular State also provided the arbitrator witha developed procedural law for supplementary reference This point is brought out by JG Wetter(who was Secretary of the tribunal) in The International Arbitral Process Public and Private vol2 (1979) pp 409-410 see also the ICC Arbitration rules (reproduced in 13 YB Comm Arb (1988)p 185) which stress in Art 26 that the arbitrator shall make every effort to make sure that theaward is enforceable at law



exercised his freedom of choice82 Those rules led the arbitrator to assume thatthe parties were free to choose a non-national proper law83

To ensure that the freedom of the arbitrator to choose the applicable conflictof laws rules is not exercised arbitrarily attempts have been made in arbitralpractice to draw up certain guidelines which an arbitrator should follow As inthe Kuwait v Aminoil arbitration case Aminoil stated in its Memorial that

as a matter of course it is for the judge or arbitrator to determine the applicablelaw in any proceeding conducted according to law In making this determinationhe cannot of course act in a purely arbitrary manner but must necessarily follow certainprinciples84

These principles or guidelines may be considered to be embedded in threecompeting views one favours the cumulative application of the conflict of lawssystems to which the subject matter of the arbitration proceedings has closecontacts a second view favours the application of international conflict of lawsrules or general principles of private international law a third view favours thedetermination of the applicable law by the arbitrator directly even without anyexpress reference to a conflict of laws rule this means dispensing with theconflict rules85

Because these three methods borrow from the technique of conflict of lawsalthough they correspond in their formal aspect to different theoreticalapproaches they can be used by the same arbitrator either alternativelydepending on the particular circumstances or concurrenty A combination of thefirst two above-mentioned methods is also often used86

The three different methods may be distinguished as follows

82 Cf Kuwait v Aminoil arbitration case the Government of Kuwaits Reply (April 1981)Pleadings Bk 9 para 247 at p 25 P Fouchard Larbitrage Commercial International (1965)paras 554 555

83 53 ILR p 297 at pp 327-32984 Pleadings Bk 1 The Aminoil Memorial (2 June 1980) vol I (Text) at p 37 para 10485 SeeO Lando Conflictof Laws Rules for Arbitrators in Festschrift fur Zweigert (1981)

at pp 157-17886 See Y Derains Report to the International Council for Commercial Arbitration Congress

(Series No 2 P Sanders ed UNCrTRALs Project for a Model Law on International CommercialArbitration (1986) p 169 at p 189 These methods (ie the three methods as mentioned) all tendto show that the parties had to expect that the law eventually chosen by the arbitrator would beapplied This is undeniably the case with respect to the cumulative application and the recourse togeneral principles of private international law these two methods point to a law which a communityto which the parties belong is unanimous in recognizing as applicable whether it is a limitedcommunity in the first case or the international community in the second But this desire to meetthe legitimate expectations of the parties is also not foreign to the method voie directe



31 Cumulative application of interested conflict of laws systems

The arbitrator may consider all the interested conflict of laws systems withwhich the contract has links in various respects rather than applying only onesystem of interested conflict rules In this process he would have to apply ruleswhich are common to these systems It may well happen that the systems underconsideration lead to the same result according to their common rules they allselect the same national law as applicable to the agreement Therefore anarbitrator does not need to choose one system of conflict of laws rules but canbase his decision on this cumulative choice where the application of differentconnecting conflict systems all lead to the same applicable law As Derains hassaid about the method

the arbitrator considers the conflict of laws rules of the various national legalsystems concerned to the disputes submitted to him one by one If these rules whosecontents are nearly always different converge towards one single domestic law thearbitrator declares that this is the applicable law87

The recent literature in the field is replete with enthusiastic support for the theoryof cumulative choice88 The same trend is also found in international arbitralpractice

In an ICC case between a West German and a Greek the arbitrator sittingin Switzerland held that

To resolve whether the substance of the claim is justified it is necessary to determineinitially the substantive law applicable to the dispute If the agreement of the partiesdoes not express itself on the subject it is necessary in the first place to research fromwhere to draw the conflict of laws rules to resolve the question The answer to thequestion is sensibly facilitated by the fact that the principles of private internationallaw developed in German law as well as in Greek law and in Swiss law lead to thesame result (emphasis added)89

The arbitrator in this case considered the connecting factors concerning thedispute in three jurisdictions viz Greece (the place of conclusion and perfor-

87 Derains loc cit n 74 p 227 at p 233 for more details see Y Derains Lapplicationcumulative par larbitre des systemes de conflit de lois interesses au litige Rev Arb (1972)p 93

88 See eg P Lalive Les regies de conflit de lois appliqueesau fond du litige par larbitreinternational siegant en Suisse Rev Arb (1976) p 155 Lew op cit n 32 at pp 335-341

89 ICC Award No 953 Doc No 41038518 January 1956 ICC Award No 787 Doc No41010421 November 1952 ICC Award No 986 Doc No 41046113 March 1957 ICC AwardNo 1990 Doc No 410217014 June 1972 ICC Award No 953 Doc No 410 38518 January1956



mance of the contract and the residence of the buyer) Germany (the place ofdomicile of the seller) and Switzerland (the seat of the arbitration) For theapplicable law the arbitrator turned to the three conflict of laws rules of thesecountries since they led to the same outcome This method shows a trend towardsthe denationalization of international arbitration The Iran-United States ClaimsTribunal has also recently resorted to this method90 Thus Lew remarked thefact that the conflict systems with which they are connected adopt the samesolution gives that solution a special character for the non-national plane91 Inan ICC Award it was observed

Even if it is generally admitted that judges decide on the applicable law according toconflict of laws rules of the State for which they render justice the arbitrators cannothave recourse to such rules to the extent that they do not derive their power from anyState But if they can show on the question in issue that the conflict rules of thedifferent States with which the matter submitted to them has any ties are similar orlead to a same result they have the power to apply these common conflict rules sincethey can be sure of satisfying the implicit or supposed intention of the parties fromwhich they derive their power92

However usually this approach appears to be quite reasonable for transactionsin which typically no more than two parties are involved Concession contractsare however very often embedded in a multilateral setting in which more thantwo parties are involved This is especially the case where the concessions areheld by interest-holders At least in these situations a cumulation of more thantwo conflict of laws systems would be required

There is another aspect however which supports an even broader approachthe fact that one and the same State grants concessions on identical terms to agreat variety of foreign concessionaires leads to the reasonable assumption thatthese concessions should all be subject to die same legal rules This result cannotbe achieved and would probably even be prevented by a mere cumulation of arestricted number of interested conflict of laws systems

32 Applicability of an international conflict of laws system

The denationalization process of international arbitration may also take placethrough the application of an international conflict of laws system93 Since thearbitrators freedom to apply any conflict of laws rule as he deems appropriate

90 See eg Carolina Brass Inc v Iran 12 Iran-USCTR (1986 III) pp 139 144 Cf Iranv United States (Case B I) 10 Iran-USCTR (1986 I) p 207 at p 216

91 Lew op cit n 32 at p33592 See ICC Case No 117693 Goldman op cit (1963) p 347 at p 414 Fouchard op cit n 82 for arguments in

favour



or suitable is not denied there should not be any reason why he should not beallowed to develop a conflict of laws rule with an international character that issuitable for its application to the particular case concerned As one scholar hasnoted one cannot argue that public international law requires the applicationof foreign law without also arguing that public international law lays down choiceof law rules because otherwise there is no satisfactory way of resolving conflictsbetween competing systems of foreign law94 In the Liamco Award Sole Arbi-trator Mahmassani said (i)ri a case involving a foreign litigant the tribunal towhich it is submitted has to refer for guidance to the general principles gover-ning the conflict of laws in private international law95

It may be noticed that the practice of international tribunals over the lastcentury has developed independent rules of private international law which maybe called rules of international conflict of laws96 Such international tribunalsdo not have a lexfori in matters of private law so they have to rest their decisionsregarding problems of private international law on an international system ofconflict of laws distinct from the municipal one97 The lexfori of such interna-tional tribunals consists of public international law as developed by custom andtreaties98

The most apposite method for the implementation of the international conflictof laws system is it has been suggested the comparative law method99 The

94 M Akehurst Jurisdiction in International Law 46 BYIL (1972-1973) p 145 at p 22295 Liamco v Libya 62 ILR pp 140-219 at p 171 see also Saudi Arabia v Aramco 27 ILR

p 117 at pp 161-16296 Diverted Cargoes case ILR (1955) p 820 5 ICLQ (1956) p 471 Rev Crit dip (1956)

p 278 8 AFD I (1956) p 427 Rev Arb (1956) p 15 Alsing case (1954) 23 ILR p 633 8 ICLQ(1959) p 320 with comments by Schwebel Aramco case (1958) 27 ILR p 117 at p 153 et seqBastid in AFDI (1961) p 300 Sapphire case (1963) 35 ILR p 136 et seq especially 170 et seqLalive in Annuaire Suisse (1962) p 273 13 ICLQ (1964) p 1011 TexacoCalasiatic Govern-ment of Libyan Arab Republic (1979) 53 ILR p 442 et seq BP v Libya (1979) 53 ILR p 297at p 326 (Part VII I) European Convention on International Commercial Arbitration 1961 ArtVII 484 UWTS( 1963-64) p 364atp374 See also K LipsteinThe General Principles of PrivateInternational Law 135 Hague Recueil (1972-1) p 97 at pp 167-193

97 See ICC Award No 151219711 YB Comm Arb (1975) at p 129 It has been observedby K Lipstein that an international system of conflict of laws differs in substance from municipalprivate international law in four essential respects It cannot rely on lexfori in matters of privatelaw renvoi is incapable public policy is determined by international law conflicts of classificationare rare mdash see 29 Transactions of Grotius Society (1944) p 76 see also pp 62-67 However inother respects rules of international conflict of laws do not appear to differ much from domesticrules of private international law (ibid)

98 See the Williams case The American-Venezuelan Claims Commission in JB MooreHistory and Digest of the Arbitrations to which United States has been a Party (1898) vol IV p4181 at p 4182

99 Bockstiegel op cit n 14 at p 27 Cf AT von Mehren Special Substantive Rules forMultistate Problems Their Role and Significance in Temporary Choice of Law Methodology 88Harvard LR (1974) p 347 See generally JM Lookofsky Transnational Litigation and Commer-



arbitrator may analyse comparatively several bodies of private international lawof the major and representative legal systems of the world for the purpose ofestablishing a set of general principles of conflict of laws In this process thearbitrator would attempt to determine general conflict rules common to manysystems and simply apply that rule to determine the proper law or applicablesubstantive law of the contract As a distinguished jurist has noted the inter-nationalists have argued however that there is an international consensus oncertain rules of private international law in the sense that domestic systems adoptand apply them so that they may be said to be general principles of law and thusof public international law 10deg

The reference to general principles of private international law may be foundin a number of arbitral awards101 In the Economy Forms case102 ChamberI of the Iran-United States Claims Tribunal referred to general principles of con-flicts of law to find that the validity issue of the contract concerned wasgoverned by a national law and not by the general principles of law It held thatUnited States law applied since the centre of gravity of these dealings was inthe United States that being the test under general principles of conflicts oflaw103 Similarly in Harnischfeger Corp v Ministry of Roads and Transporta-tion10 the Tribunal held that

The agreement makes no reference to governing law however under generalchoice of law principles the law of the United States the jurisdiction with the mostsignificant connection with the transaction and the parties must be taken to governin this specific case (emphasis added)105

Further one may note that in both the Texaco106 and Liamcom cases thearbitral tribunals expressly referred to the general principles of conflict of laws

cial Arbitration A Comparative Analysis of American European andlntemationalLaw (1992) A HEl-Ahdab Arbitration with the Arab Countries (1990) S Saleh Commercial Arbitration in theArab Middle East (1984)

100 JG Collier Conflict of Laws (1987) at p 363101 ICC Award 1959 see as reported in Fouchard op cit n 82 at p 389 ICC Award No

38801982 110 Clunet (1983) p 897 and see Lew op cit n 32 No 283 pp 327-335102 Economy Forms Corporations Governmentof the Islamic Republic of Iran the Ministry

of Energy Dam and Water Works Construction Co (SABIR) Sakatemani Mani Sahami KassMANA) and Bank Mellat (formerly Bank of Tehran) Award 55-165-1 (June 13 1983) 3 Iran-USCTR (1984) p 42 at p 48

103 Idem For criticism on the case see Chen in Chinese YIL amp Aff (1984) p 137104 7 Iran-USCTR (1984-HI) p 90105 Idem at p 99 see also Uiterwyck Corp vIran para 64 IALR (Iranian Assets Litigation

Reporter) July 6 1988 at pp 1609516102 Queens Office Tower Assocs v Iran Natl AirlinesCorp 2 Iran-USCTR (1983-1) p 247 at p 250

106 Texaco v Libya 53 ILR at p 442107 Liamco v Libya 62 ILR at p 171



Thus in the latter the arbitrator held that the search for the applicable law shouldbe guided by the general principles governing the conflict of laws in privateinternational law108

It has been recently observed

During the last half-century comparative law studies have revealed the existence ofconflict of laws rules not only common to several States but also reflecting principlesshared by the major systems of the world community The formation of certain generalprinciples of private international law has become so deeply rooted in the legal con-science that domestic legal systems have recognized those general principles as a sourceto be relied upon by me national courts to supplement conflict of laws rulesAccordingly modern doctrine and case law are currently referring to general principlesof conflict of laws as the appropriate source to determine the applicable law in relationto contractual relationships whether of a private law nature or characterized as publiccontracts109

A considerable number of awards concerning both categories of contracts ieprivate and public are reported to have supported the proposition that (t)hegeneral or universal recognition of a particular conflict rule justifies per se theapplication of that rule in an international arbitration110

The general conclusion drawn from a comparative study of the conflict of lawsrules of the various municipal law systems was succinctly summarised by ErnstRabel as follows

Among the multitude of conflicts principles mat according to various claims shoulddetermine the law applicable to all contracts only two have resisted the test of criticalanalysis These indeed form an adequate groundwork First the freedom of partiesto choose the law applicable to their contract must be recognized as a general rulewithout petty restraint Second in the absence of such agreement a contract shouldbe governed by the law most closely connected with its characteristic feature (emphasisadded)111

108 Idem in the Aramco Award the parties choice of law was approached in terms of thegeneral principles of private international law 27 ILR p 117 at pp 154 156

109 AS El-Kosheri and TF Riad The Law Governing a New Generation of PetroleumAgreements Changes in the Arbitration Process 1 ICSID Rev (1986) no 2 p 273 see alsoKuwait v Aminoil The Governments Memorial (May 1980) Pleadings Bk 3 paras 332-333at pp 58-59 But see the Aminoil Counter-Memorial vol I (Text) para 238 et seq

110 Lew op cit n 32 at p 327111 E Rabel Conflict of Laws -A Comparative Study (1958) p vii see also J-C Pommier

Principe dautonomie et lois du contrat en droit internationalprive conventionnel (1992)



There is no denying the fact that there are very few established principles or rulesof international conflict of laws which are universally acknowledged112 Besidesthe above-mentioned viz rules of party autonomy and the closest connectionothers such as locus regit actum the concept of mandatory public law rules andthe recourse to the concept of public policy to evict solutions contrary to the basicprinciples prevailing in the field of development agreements113 lex rei sitaeand lex loci actus may be worth mentioning114 Besides the role of internationaltribunals in seeking the rules of private international law common to severalStates international conventions or customs may establish rules of internationalconflict of laws and it cannot be denied that in the latter case these may possessthe character of true international law115 An eminent jurist has concluded that

International arbitrations between a State and nationals of another being hybrid incharacter can either follow as a framework the technique of international law (eithercustomary or conventional) and employ rules of international conflictof laws developedby inter-state international courts and tribunals 6

33 Dispensation with the application of conflict of laws rules

It has already been noticed above that in the process of determining the appli-cable law the application of conflict of laws rules is a cumbersome process andit may sometimes lead to uncertainties In many cases arbitrators have to basetheir decisions upon the peculiarities of different cases and to consider accordingto the practical exigencies in each case With regard to international conflict oflaws rules Akehursts comment is not to be taken lightly when he said attemptsto discover choice of law rules laid down by public international law have notbeen successful 7 Another scholar has noted purporting to choose theconflict rules of international law is in reality nothing more than a veiled

112 See K Lipstein in 135 Hague Recueil (1972-I)p 97 at p 168 Kahn-Freund in 143 HagueRecueil(1974-III)p 20etseq Lew op cit n 32 at p 328 who observes several conflict ruleshave attained a wide acceptance in many sovereign private international systems and such havebeen applied as rules generally accepted

113 See AFM Maniruzzaman International Arbitrator and Mandatory Public Law Rulesin the Context of State Contracts An Overview 7 J Int Arb (1990) no 3 p 53 see also El-Kosheri and Riad loc cit n 109 p 273

114 See P Lalive Transnational (or Truly International) Public Policy and InternationalArbitration in P Sanders ed Comparative Arbitration Practice and Public Policy in Arbitration(1987) p 257 at pp 301-309 GA Zaphiriou The Transfer of Chatties in Private InternationalLaw (1956) pp 25-30

115 See the Serbian Loans case France v Kingdom of Serbs Croats and Slovenes) 1929 PCIJSer A Nos 20-21 at pp 40-42 (Judgment No 14 of July 12) ICC Award No 17171972101Clunet (1974) p 890

116 Lipstein loc cit n 13 at p 194117 M Akehurst Jurisdiction in International Law 46 BYIL (1972-1973)p 145 atp 222



attempt to allow the arbitrators to choose any substantive law they wish forinternational law can provide no real guidance8 It may well be that such anapproach allows for appropriate flexibility and that it encourages due sensitivityto the underlying political realities of arbitration9 Indeed the argument isbeing increasingly advanced that arbitrators need not rely on any conflict of lawsrule in order to determine the applicable law but that they should choose anappropriate law directly120 In practice it also appears that an arbitrator some-times does not deem it necessary to apply any conflict of laws system whethernational or international121 As Judge Bellet the former First President of theCour de Cassation France has observed The modern view seems to be thatinternational arbitrators need no longer be bound by strict rules of conflicts oflaw122

The truth of this view has been reflected clearly in Article V of the Iran-UnitedStates Claims Settlement Declaration123 The Article establishes a range ofpossibilities for determining the governing law The Tribunal can apply suchchoice of law rules and principles of commercial and international law as theTribunal determines to be applicable1 In contrast with other familiar interna-tional arbitration rules mentioned earlier125 this formula does not require theapplication of any system of conflict of laws rules The Tribunal is free to selectrules of substantive law from whatever sources and through whatever processes

118 S J Toope Mixed International Arbitration (1990) p 51119 Idem120 Lew op cit n 32 p 225121 Idem No 302 et seq122 P Bellet Forward 16 Law amp Policy Int Bus (1984) at p 673 Bellet an original

member of the Iran-US Claims Tribunal remarked with regard to the applicable law issue to befaced by the Tribunal that It would have been extremely awkward for these arbitrators to haveresorted to classic rules of conflict of law forcing the arbitrators to choose between Iranian lawand American law With tensions running high it was worth avoiding such choices particularlyin cases where the parties alleged political or economic coercion in the execution of certain contractsIn this way claimants and their opponents were practically always in agreement not to invoke anyrigid conflict of law rules (p 673)

123 Under Art V of the Claims Settlement Declaration the Iran-US Claims Tribunal has greatflexibility in its choice of law Accordingly the Tribunal has sometimes rejected the applicationof municipal law and has applied general principles of law It has also adopted its own procedurallaw and choice-of-law principles With regard to the Iran-US Claims Tribunal Stein pointed outthat the Tribunal has generally declined the invitation of the Claims Settlement Declaration to enterinto subtle and academically satisfying discussions of conflict of laws principles see the remarksmade by TL Stein in ASIL Proceedings of the 78th Annual Meeting (1984) pp 229-233

124 See US Dept St Bull at p 4 1 Iran-USCTR (1982) p 9 at p 11125 For example Art VII(I) of the European Convention on International Commercial

Arbitration Art 13(3) of the ICC Arbitration Rules Art 33 of the UNCITRAL Arbitration Rulesand Art 28 of UNCITRALs 1985 Model Law on International Commercial Arbitration all requirearbitrators to act within some system of conflict of laws rules (as they deem applicable or determineappropriate)



it chooses One method of avoiding the complexity of conflict of laws rules isknown as the comparative approach126 The particular merit of the methodconsists in dispensing altogether with the application of conflict of laws or privateinternational law If either the rules of the respective countries concerning conflictof laws or the rules of the substantive law are identical there is no need to applyan international system of conflict of laws On this ground the arbitrator maycompare the substantive rules of the various countries connected with the disputewhich may eventually lead him to the same outcome127

In the practice of the Mixed Arbitral Tribunals it may be noticed as Lipsteinobserved five decades ago128 that in resorting to the comparative approachthe tribunals either applied the method of expressly coupling municipal sys-tems129 or they invoked a conception oidroit commun which in reality consistsof a cumulation comparison and merger of the national systems concerned130

The method commends itself from a practical point of view at least in somecases and it provides international tribunals with a more solid basis for theirdecisions than the international approach It may serve the needs of an interna-tional arbitral tribunal between a State and the nationals of another in dealingwith the specific topics of concession or loan agreements131 However it is alsoto be accepted that when neither the respective municipal rules concerningconflict of laws nor the substantive rules are identical it is of no avail Veryrecently Lipstein has concluded that in the absence of an express choicecomparative law in the form of general principles of law provides the rule ofdecision often eclectic and vague rather than a particular system of laws132

Von Mehren after a thoughtful analysis of the issue from different perspectiveshas also recognized the practical difficulties and unsoundness of the comparativelaw method133

126 See for a good discussion Von Mehren loc cit n 99 p 347127 See eg ICC Award No 28861977105 Clunet (1978) p 996 ICC Award No 2172

Doc No 4102384 1974128 See 27 Transactions of the Grotius Society (1942) at p 151129 The decisions of the Mixed Arbitral Tribunals (MAT) are cited according to G Gidel

Recueildes decisions des Tribunaux Arbitraux Mixtes 9 vols (1921-1930) (references are to thevolume and page of the Recueil) (1) p 587 ibid p 847 ibid p 899 (903) (2) p 89 ibidp 235 ibid p 247 ibid p 753 ibid p 786 (3) p 155 ibid p 220 ibid p 286 ibid p296 ibid p 328 ibid p 340 ibid p 387 ibid p 408 ibid p 534 ibid p 570 ibid p872 ibid p 988 (991) ibid p 1020 (4) p 366 ibid p 417 (5) p 200 (213) ibid p 224ibid p 346 ibid p 637 ibid p 790 (6) p 565 ibid p 671 (7) p 221 ibid p 429 ibidp 589 ibid p792 ibid p 881 (8) p 933 ibid p 1000 (9) p 424 ibid p 560

130 See eg MAT (2) p 247 ibid p 251 ibid p 641 (4) p 530 (5) p 520 (6) p 934(7) p 17 ibid p 25 ibid p 57 ibid p 601 ibid p702 785 (8) p 994 (9) p 302

131 Lipstein loc cit n 13 at p 194132 Ibid133 SeeAT von Mehren Choice-of-Law Theories and the Comparative Law Problem 23

AJCL (1975) p 751 et seq



Another way of avoiding conflict of laws questions by the arbitrator may beby having recourse directly to the substantive law of a non-national standard134

such as international law international law of contracts135 the lex merca-torianfgt or the customs and usages of the trade or the general principles oflaw137

In order to avoid the conflict of laws issues recent developments in nationallegislation indicate a preference for making a direct choice of the national law

134 Lena Goldfields case (Lena Goldfield Ltd v USSR) Award of 2 September 1930 noteby Nussbaum in 36 Cornell LQ (1950) p 51 Abu Dhabi case (PetroleumDevelopmentLtd v Sheikhof Abu Dhabi) Award of 28 August 1951 in ICLQ (1952) p 247 ILR (1956) p 144

135 See the Texaco Award 53 ILR p 389 p 441 et seq But see M Sornarajah The Mythof International Contract Law 15 JWTL (1981) p 187

136 It is considered that the lex mercatoria has the advantage of doing away with the choice-of-law process The published awards show several instances of a preference of the lex mercatoria forthe intricacies of private international law see eg ICC Award No 313126 October 1979reported in IPRax (1984) p 97 (Pabalk TicaretLtd Sirketi v Norsolor SA) also in 9 YB CommArb (1984) p 109 the ICC ad hoc Award of 23 July 1981 8 YB Comm Arb (1983) p 89 atp 91 See also PC Jessup Transnational Law (1956) CM Schmitthoff ed The Sources of theLaw of International Trade (1964) B Goldman Frontiers dudroitet lex mercatoria 9 Archivesde Philosophiedu droit (1964) p 177 et seq E Loquin Lamiable composition en droit compareet international (1980) B Goldman La Lex Mercatoria dans les contrats et 1arbitrage internatio-naux Realite et perspectives 106 Clunet (1979) p 475 P Fauchard LArbitrage commercialinternational (1965) especially Art 604 et seq BM Cremades and SL Plehn The New LexMercatoria and the Harmonization of the Laws of International Commercial Transactions BostonUILJ (1984) p 317 BM Cremades The Impact of International Arbitration on the Developmentof Business Law 31 AJCL (1983)p 526 HJ Berman and C Kaufman The Law of InternationalCommercial Transactions (Lex Mercatoria) 19 Harvard ILJ (1978) p 221 O Lando The LawApplicable to the Merits of the Dispute in P SarCevic ed Essays on International CommercialArbitration (1989) p 129 A Goldstajn The New Law Merchant JBL (1961) p 12 andReflections on the Structure of the Modern Law of International Trade in Sarcevic ed op citn 14 Ch 2 Ph Kahn in Festschrift Schmitthoff (1973) Y Derains Le statut des usages ducommerce internationaldevant les juridictionsarbitrates Rev Arb (1973) p 122 O Lando TheLex Mercatoria in International Commercial Arbitration 34 ICLQ (1985) p 747 et seq BMCremades and SL Plehn The New Lex Mercatoria and the Harmonization of the Laws of Inter-national Commercial Transactions Boston Univ ILJ (1984) p 317 et seq F DasserInternationale Schiedsgerichte und Lex Mercatoria RechtsvergleichenderBeitrag zur DiskussionUber Ein Nichtstaatliches Handelsrecht (1989) I Strenger La notion de lex mercatoria en droitdu commerce international 227 Hague Recueil(1991-II)p 207 WMReismm Systems of Controlin InternationalAdjudication and A rbitration Breakdown and Repair (1992) at pp 134-139 F DelyInternational Business Law and Lex Mercatoria (1992) N Horn and CM Schmitthoff eds TheTransnational Law of International Commercial Transactions (1982) F Osman Les PrincipesGeneraux de la Lex Mercatoria Contribution a Ietude dun ordre Juridique Anational (1992)

137 For instance in Elf Aquitaine Iran v NIOC 9 YB Comm Arb (1986) at pp 97 99 thesole arbitrator confirmed the parties choice of equity the general principles of law and internationallaw without reference to any system of conflict of laws



or other standards which the arbitrators common sense and commercial experi-ence suggest to be the most appropriate for the particular circumstances138

4 THE ARBITRATORS SILENT APPROACH TO CONFLICT OFLAWS RULES

It may be noticed that sometimes arbitrators do not in fact mention whichparticular conflict of laws system they have followed to determine the applicablelaw139 Thus the Aminoil award does not explicitly state which body of conflictrules it followed It may well be that the Aminoil tribunal proceeded implicitlyon the basis of general principles of private international law This is evidencedby the absence of any reference to a particular private international law particu-larly that of France being the place of arbitration which the Government ofKuwait suggested should be applied140 while on the contrary Aminoil advo-cated the application of the general principles of private international law141

138 See for example the French Arbitration Decree of 14 May 1981 which amended Art1496 of the Code of Civil Procedure 20 ILM (1981) p 917 Art 1496 of the French New Codeof Civil Procedure reads The arbitrator shall decide the dispute according to the rules of law chosenby the parties in the absence of such a choice he shall decide according to rules he deems appropri-ate In all cases he shall take into account trade usages (emphasis added) See also ICC Award No14221966 Lew op cit n 32 no 270 The 1984 Djibouti Code on International Arbitrationcontains in its Art 12a a provision in similar terms The parties are free to determine the rulesof law which the arbitrators shall apply to the substance of the dispute Failing agreement by theparties the arbitrators shall apply the rules of law which they consider appropriate (emphasis added)In all cases the arbitrators shall take into account contractual provisions and shall apply internationaltrade usages (as quoted by Y Derains Public Policy and the Law Applicable to the Dispute inInternational Arbitration in Sanders ed op cit n 114 p 227 at p 230) See also for similarprovisions the Swiss Private International Law Act ch 12 Art 187 and the NetherlandsArbitration Act 1986 Art 1054 See the United Nations Commission on International Trade Law(UNCITRAL) Model Law adopted on 21 June 1985 Art 28 see also C Croff The ApplicableLaw in an International Commercial Arbitration Is it Still a Conflict of Laws Problem 16 IntLawyer (1982) p 613 at p 633

139 See eg ICC Award No 27351976104 Clunet (1977) p 947 see also two cases citedat p 949 and ICC Award No 28701978 (not reported) These cases provide evidence that inpractice arbitrators sometimes rely upon a conflict of laws rule without disclosing from which legalsystem or other source it has been derived See also ICC Award No 1048 Doc No 410802 11January 1960

140 See Kuwait v Aminoil The Governments Memorial Pleadings Bk 3 para 334 at p59 see also The Governments Reply (April 1981) Pleadings Bk 9 paras 236-254 at pp 20-27See generally J Robert and TE Carbonneau The French Law of Arbitration (1983)

141 See Kuwait v Aminoil Aminoil Memorial (2 June 1980) vol I (Text) Pleadings Bk 1paras 105-113 pp 37-40 see also Aminoil Counter-Memorial (5 January 1981) vol I (Text)paras 226-243 at pp 103-111 66 ILR p 519 at pp 559-562



It is presumed that the Tribunal adopted Aminoils suggestion in fact though notexpressly

5 INTERNATIONAL INVESTMENT AGREEMENTS A SPECIALCASE

On the basis of the sui generis nature of concession and other similar investmentagreements142 and their fundamental difference from ordinary commercial con-tracts143 application of different principles to the former for the purpose ofdetermining the applicable law has been favoured in a number of arbitralawards144 as well as in the literature145 It cannot be denied however thatin the case of the aforementioned types of state contract many arbitral tribunalshave applied traditional rules of private international law in order to determinethe proper law without distinguishing between state contracts and ordinarycommercial contracts146

However in the absence of an express choice of law provision the search fora single legal system does not seem to occur frequently in the context of suchcontracts This trend has been well recognized in the 1989 Santiago Resolutionof the International Law Institute147 The resolution seems to confirm themodern arbitral practice Thus in the words of Lalive

Yet in spite of all the obvious links between the contract and the domestic law of theState concerned it happens that in a great number of these international contracts thereare overriding reasons to show that the parties intended to reach a different resultgt148

142 See I Amco Asia Corporation v Indonesia [1988] LAR at pp 38-40 See also JNDAnderson and NJ Coulson The Moslem Ruler and Contractual Obligations 33 NY Univ LR(1958) p 917 at pp 921-922

143 See the Sapphire Award (1963) 35 ILR p 136 at pp 171-176 See also AFMManiruzzaman State Contracts with Aliens The Question of Unilateral Change by the State inContemporary International Law 9 J Int Arb (1992) no 4 pp 141-171

144 Idem Texaco vLibya 53 ILR at p 441 etseq Revere Coppery OPIC 56 ILR p 258at pp 272-279 Sapphire International Petroleum Ltd v NIOC 35 ILR p 136 at pp 170-176

145 See eg Ramazani loc cit n 57 p 503 at p 505 Lalive loc cit n 15 p 987 atp 994

146 See eg theAlsing case 23 ILR p 633 where the private international law of the seatof the arbitral tribunal ie the lexfori was applied to determine the applicable law see also theICC case Mojzesz Lobelski v State of Burundi Award of 30 October 1968 in Jurisprudence duPort dAnvers (1969) pp 82 89 90

147 For the text of the Resolution on Arbitration Between States and Foreign Enterprises(1989) see 5 ICSID Rev (1990) p 139 (Art 6)

148 Lalive loc cit n 15 at p 994 see also Kuwait v Aminoil The Aminoil Counter-Memorial (5 January 1981) vol I (Text) Pleadings Bk 4 para 240 at p 109



There appears to be a consistent trend in arbitral practice to apply the notion ofdepegage or split proper law149 in the absence of any express choice of lawby the parties150 In the Kuwait v Aminoil arbitration case the Governmentof Kuwait stated in its Memorial that

It should be recognized of course that an agreement as complex as a concessionagreement may be subject to more than one system of law in that certain matters mayfall to be determined under one system others under another Thus for exampleactivities which take place outside the territory of me contracting State may be governedby another system of law This was a conclusion reached in the Aramco arbitra-tion51

Usually it appears that arbitral tribunals apply the municipal law of the contract-ing State to the matters falling exclusively within the jurisdiction of that Stateand as regards other matters such as the States right to exercise legislativeauthority or any other prerogatives to interfere with contractual rights or tomodify or terminate them or as regards the question of remedies or compensa-tion they apply or tend to apply some non-national standard such as public

149 See generally MB Hanotau Depecage in Choice of Law An Analysis in Le Contrateconomique internationalstabilite et evolution (1973) l-A-3 Reese loc cit n 23 p 58 But seeC McLachlan Splitting the Proper Law in Private International Law 61 BYIL (1990) p 311M Ekelmans Le depecage du contrat dans la Convention de Rome du 19 juin 1980 sur la loiapplicable aux obligation contractuelles in Melanges offerts a Raymond von Elst (1986) p 243

150 See eg the Lena Goldfields case 36 Cornell LQ (1951) p 31 Sapphire InternationalPetroleums Ltd v National Iranian Oil Co 35ILR p 136 the Electricity Companies case (1966)reported in P Weil Problems relatifs aux contrats passes un Etat et un particulier 169 HagueRecueil (1969) Saudi Arabia v Aramco 27 ILR p 117 Revere Copper amp Brass Inc v OPIC56ILRp 258 SPP (Middle East) Ltd etal v Arab Republic ofEgypt 22 ILM (1983)p 752Kuwait v Aminoil 66 ILR p 518 Wintershall AG et al v Government of Qatar [1990] LARp 81 DeutscheSchachtbau-undTiefbohrgesellschaftmbH (DST) (FRG) etal v The GovernmentoftheStateofRasAlKhaimah (UAE)andTheRasAlKhaimah Oil Company (RATOIL) ICC caseno 3572 of 1982 14 YB Comm Arb (1989) at p 111 the Consortium case (ie Mobil Oil IranInc et al v Iran and NIOC (Partial Award in cases nos 74 76 81 150-311-747681159-3of14 July 1987)) 13 YB Comm Arb (1988) p 288 See also Texacov Libya 53 ILR p 393 BPv Libya 53 ILR p 297 Liamco v Libya 62 ILR p 140RB vonMehrenandPM KouridesInternational Arbitrations between States and Foreign PrivateParties The Nationalization Cases 75 AJIL (1981) p 476 C Greenwood State Contracts inInternational Law - The Libyan Oil Arbitrations 53 BYIL (1982) p 27 FA Mann TheAminoil Arbitration 54 BYIL (1983) p 213 A Redfern The Arbitration between the Govern-ment of Kuwait and Aminoil 55 BYIL (1984) p 65 FR Teson State Contracts and OilExpropriations The Aminoil-Kuwait Arbitration 24 Va JIL (1984) p 323

151 See Pleadings Bk 3 The Governments Memorial (Text) (May 1980) S 338 at p 60see also The Governments Counter-Memorial (December 1980) Pleadings Bk 5 paras 385-386at p 84 also paras 387-389 at pp 84-85 para 397 (5) at pp 88-89


232 AFM MAN1RUZZAMAN NILR 1993

international law general principles of law or other non-national standards152

To the latter category of issues the tendency to apply a non-national standardis said to be justified by the parties implied choice or intention deduced fromcertain elements in the contract such as good faith clauses153 stabilisationclauses an arbitration clause and the nature of the contract itself ie fallingwithin the category of economic development agreements154 These contractualelements are considered to internationalize such contracts requiring the applicationof some non-national standard to certain specific issues as stated earlier Besidesthis subjectivist approach the objectivist approach of private international lawalso supports this position As it is clearly reflected in the Aminoil Memorialin the Kuwait v Aminoil case155 that

even if the parties in the present case had not chosen these general principles (ortransnational law) as the applicable law it is submitted that the selection of generalprinciples of law would result from an objective determination by the arbitratorsin accordance with the general principles of private international law Such a selectionwould be the most appropriate for the subject matter should be presumed to be thepreference of reasonable persons in the position of the parties and would best servethe needs of justice and of international commerce in the modern world (emphasisadded)156

152 Ibid see also E Paasivirta Participation of States in International Contracts and ArbitralSettlement of Disputes (1990) at pp 105-113 ICCA Report (Series No 2) at pp 188-189

153 See the Lena Goldfields case 36 Cornell LQ (1951) p 31 (Art 89 of the agreementconcerned between the parties) see also Kuwait v Aminoil The Aminoil Memorial (2 June 1980)Pleadings vol I (Text) Bk 1 paras 114-117 at pp 40-41 But see The Governments Counter-Memorial (December 1980) Pleadings Bk 5 para 335 Delaume op cit n 64

154 See Texacov Libya 53ILR p 389 at pp 452-457 paras 40-43Revere Coppery OPIC56 ILR p 258 at pp 272-279

155 See vol I (2 June 1980) (Text) Pleadings Bk 1 p 39156 Ibid para 113 at pp 39-40 see also the Aminoil Reply (27 April 1981) Pleadings Bk

7 paras 50-76 at pp 20-30 Aminoil suggested that in view of Art 111(2) of the ArbitrationAgreement (that the specific terms of Article 111(2) taken in the context of the Arbitrationas a whole and of the contractual relations between the parties) the applicable law should be thegeneral principles of law Ibid Aminoil Memorial vol I (2 June 1980) (Text) Pleadings Bk 1p 39 para 113 Art 111(2) of the Arbitration Agreement between Kuwait and Aminoil providesthat The law governing the substantive issues between the parties shall be determined by theTribunal having regard to the quality of the parties the transnational character of their relationsand the principles of law and practice prevailing in the modern worldSeealso CM1InternationalInc v Ministry ofRoads andTransportationetal 4 Iran-USCTR(1983)p 263 at p 268 GA Bermann Contracts between States and Foreign Nationals A Reasses-smentinH Smitetaleds International Contracts (1981) Ch 7pp 183-212 WLM ReeseThe Law Governing International Contracts ibid Ch 1 pp 3-50 See also ICCA Report (SeriesNo 2) p 190 The concern to apply the law best corresponding to the expectations of the partiestherefore seems to be the central element in the determination of the legal norms which theinternational arbitrator must apply in solving a dispute When the parties have expressly chosen theapplicable law the object of this expectation is a priori known and therefore becomes useless



6 ABSENCE OF CHOICE OF LAW AND ICSID PRACTICE

The ICSID Convention (sometimes called the Washington Convention) has openeda new dimension in the matter of applicable substantive law when the parties didnot or failed to choose the same Article 42(1) of the Convention provides that

The Tribunal shall decide a dispute in accordance with such rules of law as may beagreed by the parties In the absence of such agreement the Tribunal shall apply thelaw of the Contracting State party to the dispute (including its rules of the conflict oflaws) and such rules of international law as may be applicable (emphasis added)

There is no doubt that in the first sentence of the above provision the Conventionfirmly confers on the contracting parties to an investment agreement unlimitedautonomy as to the applicable law and makes their choice binding on theTribunal157 Thus the provision confirms the universal rule of the autonomyof the will of the parties Here we are concerned in particular with the secondsentence of the article ie the matter of applicable law in the absence of choiceof law by the parties In favouring the application of the law of the host Statein the first instance in the absence of a choice of law clause the second sentenceconfirms the principle that the law of the place where the investment is madeor where the investment operations have their closest connections would beprimafacie applicable This formulation of the first instance application conforms tothe result which in most cases would be reached in any event by the applicationof conflict rules The formulation also goes along the same lines that the Perma-nent Court of International Justice in the Serbian and Brazilian Loans case158

declared and which was later affirmed by the Aramco Tribunal159 The latterTribunal found different laws to govern the different aspects of the concessionsimultaneously and in support of its application of Saudi Arabian law to theeffects of the concession in Saudi Arabia the Tribunal stated as follows

The law in force in Saudi Arabia should also be applied to the content of the Conces-sion because this State is a Party to the Agreement as grantor and because it isgenerally admitted in private international law that a sovereign State is presumedunless the contrary is proved to have subjected its undertakings to its own legalsystem This principle was mentioned by the Permanent Court of International Justicein its Judgments of July 12th 1929 concerning the Serbian and Brazilian loans160

Failing such a choice the arbitrator tends to show what this expectation could legitimately be eitherin concreto or in consideration of a certain international consensus

157 See also ICSID Model Clauses Doc ICSIDSRev 1 7 July 1981158 Serbian amp Brazilian Loans cases Judgments 14 and 15 (1929) PCIJ ser A No 20 at

p 42 No 21 at p 121159 Saudi Arabia v Aramco 27 ILR at p 117160 Ibid at p 167



In the face of the wording of the second sentence of Article 42(1) of the ICSIDConvention which mentions two systems of law viz national law first andinternational law second it appears as a logical consequence that the role of thelatter law is that of a corrective standard for the former The view was alsoendorsed by Broches the leading man behind the Convention when he expressedhis opinion explaining the presumed relationship between the law of the host Stateand international law in the same context Thus he had this to say

The Tribunal will first look at the law of the host State and that law will in the firstinstance be applied to the merits of the dispute Then the result will be tested againstinternational law That process will not involve the confirmation or denial of thevalidity of the host States law but may result in not applying it where that law oraction taken under that law violates international law61

The travaux preparatoires162 and the Convention as a whole bear the evidencethat this corrective role of international law vis-d-vis the host States law in theabsence of choice of law by the parties is attributed to the fact that ICSID is aninternational arbitration institution which was intended by the parties to treat thematter as such The Convention in that provision thus gives effect to the pre-sumed intention of the parties that absent a choice of law clause in the agree-ment the submission itself to the ICSID tribunal would require it to apply thehost States law in the light of international law The Tribunal has already appliedthis formula in a number of cases163

With regard to the method of applying the formula in the second sentence ofArticle 42(1) and the operational relationship between the two systems mentionedtherein the ICSID Ad hoc Committee in the Klockner v Cameroon case164

clarified the position with some precision The Committee had to review an

161 A Broches The Convention on the Settlement of Investment Disputes between States andNationals of Other States 136 Hague Recueil (1972-11) p 331 at p 392

162 ICSID Documents Concerning the Origin and the Formulation of the Convention vol 2part 2 p 270 et seq

163 See eg Benvenuti amp Bonfant 21ILM (1982) at p 752 AGIP Co v PeoplesRepublicof Indonesia 24 ILM (1985) p 1023 AMCO Asia Corp et al v The Republic of Indonesia 24ILM (1985)p 1023 AMCO Asia Corp etal v The RepublicofIndonesia (Final Award of 5 June1990 and Decision on Supplemental Decision and Rectification of 17 October 1990) 17 YB CommArb (1992) p 73 at pp 75-76 Liberian Eastern Timber Co (Letco) v Liberia ICSID Awardof 31 March 1986 26 ILM (1987) pp 661-662 Klockner v Cameroon 1 ICSID Rev (1986) p89 See also Asian Agricultural Products Ltd (AAPL) v Republic of Sri Lanka 30 ILM (1991)p 580 also in 17 YB Comm Arb (1992) p 106 see also comments on the case in SC Vascian-nie Bilateral Investment Treaties and Civil Strife The AAPLSri Lanka Arbitration 39 NILR(1992) p 332 especially at pp 335-339 See also A Burzynski Paving the Road for Settlementof Investment Issues Polish ExperienceSo Far 18 Polish YIL(1989-1990)p 135at pp 140-141EPJ Myjer ICSID and the Settlement of Investment Disputes in Poland ibid p 143

164 11 YB Comm Arb (1986) p 162



earlier award of the ICSID tribunal on the ground of exercise of excess of powerby the tribunal with regard to the applicable law in the context of the secondsentence of the aforementioned article The Committee stated as follows

Article 42 of the Washington Convention provides that in the absence ofagreement between the parties the Tribunal shall apply the law of the ContractingState party to the dispute and such rules of international law as may be appli-cable This endows these principles (leaving aside perhaps the case where it couldbe ascertained whether the internal law conforms to international law) with a doublerole either complementary (in the case of a lacuna in the law of die State) or correct-ive in the case where diis law does not conform in all respects to the principles ofinternational law Be that as it may and in both cases the arbitrators can have recourseto the principles of international law only after having reached and established thecontents of the law of the State party to the dispute and after having applied therelevant rules of that law (emphasis added)165

Later another ICSID Ad hoc Committee in the Indonesia v Amco Asia Corpcase166 endorsed the same explanation in the following words

Article 42(1) of the Convention audiorizes an ICSID tribunal to apply rules ofinternational law only to fill up lacunae in the applicable domestic law and to ensureprecedence to international law norms where the rules of applicable domestic law arein collision with some norms167

The above views clarify the position that according to Article 42 of the Conven-tion international law has a supplemental and corrective role in relation to thelaw of the host State as the applicable substantive law in the absence of anychoice of law by the parties The Convention thus strikes a balance between thetheories of localization and delocalization of applicable substantive law TheICSID formulation and practice appear to have had some influence upon thedecisions of other international arbitral tribunals168

165 Ibid at p 170166 12 YB Comm Arb (1987) p 129 at p 132167 Idem168 See eg the ICC Award in SPP (Middle East) Ltd and SPP Ltd v Egypt and

Egoth 22 ILM (1983) p 752 at pp 768-770 an the Ad hoc Tribunal Award in Kuwait v Aminoil66 ILR p 518 In recent contract practice the ICSID formula is sometimes found to be explicitlyincorporatedinconcessioncontractsThus a 1987 Ghanaian agreement provides that This Agree-ment shall be governed by and construed in accordance with the laws of Ghana and such principlesof international law as may be applicable



7 CONCLUSIONS

In the foregoing survey certain trends have been noticed in international commer-cial arbitral practice with regard to the application of conflict of laws rules indetermining the applicable substantive law in the absence of the contracting par-ties choice as such in an investment agreement or in a compromise69 Fromthese some conclusions may be drawn as follows

(1) In international commercial arbitration involving a State or a State enter-prise the same principles are normally applied to solve choice of law issues asare applied in international commercial arbitration between private partiesHowever there is a trend in arbitral practice in a growing number of cases toapply additional specific criteria to determine a non-national standard to beapplicable to certain aspects of the dispute under consideration because of theinvolvement of the State or its controlled enterprise as a party

(2) The traditional conflict of laws rule of the lexfori according to whichthe arbitral parties as well as the arbitrators choice of applicable law shouldbe governed has lost its attraction in modern arbitral practice the principalreason being inter alia that an international arbitration is considered to haveno lexfori of its own its authority derives from the partiesagreement

(3) In the absence of a choice of law provision in the agreement or in thecompromis the arbitrator may apply the closest connection or most significantrelationship rule sometimes known as the converging connecting factors testof conflict of laws This would lead to the objective localization of an investmentagreement in the host States law because most of the connecting factors in thecontext of such an agreement would indicate that law This is equally true in thecases of most investment agreements The rule is considered to be a generalprinciple of law because of its being common to most legal systems hence partof public international law

(4) The closest connection or most significant relationship rule may beconsidered to satisfy both subjectivist and objectivist tests of conflict of laws

(5) The arbitrators freedom to choose conflict rules for the purpose ofdetermining applicable substantive law represents an important ingredient of thetheory of delocalization of international arbitration

(6) The move towards the theory of delocalization of international arbitrationhas been reflected in the different approaches to conflict rules developed inarbitral practice These approaches or methods guide an arbitrator in exercisinghis freedom to choose conflict rules for the purpose of determining applicable

169 Redfern and Hunter op cit n 6 at p 12 an agreement to arbitrate representeda compromise on the part of the parties and this is reflected in the language of the civil law whichrefers to a submission agreement as a compromis and to an arbitration clause as a clause compromis-soire See also fn 44 The secondary meaning of compromis is given as an agreement under whichthe parties make mutual concessions Roberts Dictionnaire de la languefrangaise



substantive law to the merits of the dispute in hand The approaches such as (i)cumulative application of interested conflict of laws systems and (ii) an interna-tional conflict of laws system are meant to commend acceptance by both thedisputing parties because of the neutrality of the approaches and the realizationof the legitimate expectations of the parties that an international arbitrator is notbound by any particular national conflict rules It should be noted however thata recourse to either of the approaches would lead to the application of a singlelegal system In some cases it is possible that a concurrent or an alternativerecourse to these two approaches may result in the application of the closestconnection or most significant relationship rule of conflict of laws It has beenremarked In looking for the legal system which has the closest points of contactto the relation created by the parties the arbitrator shows that the links betweenthis relation and the legal system are such that the parties cannot be surprisedby its application170

The rule of direct application of the suitable substantive law by the arbitratorallows him comparatively wide discretion by virtue of which he can apply thetheory of denationalization stricto sensu in practice

(7) Article 42(1) of the ICSID Convention and the practice of the ICSIDtribunals have struck a balance between the theories of localization anddelocalization of applicable substantive law in the context of an internationalarbitration concerning investment disputes Such a compromise formula betweenthe two theories may turn out to be a model for the future in the situation of theabsence of choice of law

170 See ICCA Report (Series No 2) p 189



reason why many of the more recent investment agreements are silent on theapplicable law clause In order to settle the dispute the arbitrator then has todischarge the difficult task of determining the law applicable to the contract Itcannot be denied that whoever whether the parties or the arbitrator determinesthe applicable law which governs an investment agreement the determinedapplicable law plays an important role in the interpretation of such an agreementand the rights and obligations of the parties flowing therefrom

The purpose of this article is to examine the different methods of conflict oflaws or private international law3 that arbitrators follow in order to determinethe proper law or applicable substantive law of a contract when the choice of lawprovision is absent in it It will be shown that there are two principal trends inthose methods that lead respectively to the theories of localization and delo-calization or denationalization of international arbitration4 The arbitratorsfreedom of will plays an important role towards such denationalization To whatextent arbitrators can exercise that freedom is a matter of some controversy Itshould be mentioned that the present study bears closely upon Article 28(2) ofthe UNCITRAL Model Law on International Commercial Arbitration (1985)5

which authorises the arbitrator to apply conflict of laws rules in determining theproper law of the contract when this has not been designated by the parties6

The Model Law is now being increasingly adopted in many developed anddeveloping countries7 On the question of choice of applicable conflict of lawsrules the discussion will try to offer some practical insights

2 THE ARBITRATORS TASK IN DETERMINING THE APPLICABLELAW

In the complete absence of an express choice of law provision by the parties8

the arbitrator is entrusted with the task of determining the proper law of the

3 In this articleconflictof lawsand private international law have been used interchangeablyso have conflict of laws and conflicts of law

4 The terms delocalization and denationalizationused in this article are interchangeable5 As adopted by the UN Commission on International Trade Law on 21 June 19856 Art 28(2) of the Model Law on International Commercial Arbitration provides that Failing

any designation (of law applicable to the substance of the dispute) by the parties the arbitral tribunalshall apply the law determined by the conflict of laws rules which it considers applicable See 2Arbitration Int (1986)p l l a tp 18 also in A RedfemmdMHunterLawandPracticeofInterna-tional Commercial Arbitration 2nd edn (1991) App 21 p 798 at p 806 pp 508-527 see alsoG Herrmann UNCITRAL Adopts Model Law on International Commercial Arbitration 2Arbitration Int (1986) p 2 G Herrmann The UNCITRAL Model Law - Its Background SalientFeatures and Purposes 1 Arbitration Int (1985) p 6

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