Chap 5 Part A Fouchard, Gaillard, Goldman - THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. CHAPTER I APPLICABLE LAW CHOSEN BY THE PARTIES 1420. - The law applicable to the merits of the dispute is chosen by the parties or, in the absence of any agreement between the parties, by the arbitrators. It is important to clearly distinguish these two situations, particularly because issues which appear to arise in similar terms in both, such as the role of trade usages or the impact of international mandatory rules, have in reality very different implications depending on whether they are matters affecting a choice made by the parties' or simply aspects of a decision reached by the arbitrators.2 We shall examine first the situation where the parties have chosen the applicable law (Chapter I), and then that where it is chosen by the arbitrators (Chapter II). 1 See infra para. 1515. 2 See iefra para. 1557. 1421.- Virtually all modem arbitration laws recognize that, in international situations, the parties are free to determine the law applicable to the merits of the dispute which the arbitrators are to resolve. This principle, traditionally referred to as the principle of party autonomy, is binding on the arbitrators. In French international arbitration law, the rule is set forth in Article 1496 of the New Code of Civil Procedure, which states that "[t]he arbitrator shall resolve the dispute in accordance with the rules of law chosen by the parties." This provision is generally considered to be a substantive rule of international arbitration.' As a result, under French law arbitrators confronted with a choice of law made by the parties need not consider the validity of such a choice under the law which they consider governs the choice of law agreement. By providing, in a rule applicable to all international arbitrations, that party autonomy governs, French law avoids that additional step. By contrast, when discussing Article 187 of the Private International Law Statute, which is the corresponding provision in Swiss law, some authors have felt it necessary to allude to, if not to fully examine, the law applicable to the choice of law agreement, while recognizing at the same time the theoretical nature of doing so as the principle of party autonomy is widely accepted in comparative law.2 We believe this detour to be unnecessary. In fact, when the party autonomy principle is framed in sufficiently broad terms, as is the case in France and Switzerland for example, the law chosen by the parties will govern all substantive aspects of the dispute, and not just the issues covered by the lex contractus: the principle of party autonomy has an even greater scope in the context of arbitration than it does before national courts, and thus cannot be based exclusively on the recognition of the parties' freedom to select the law applicable to contracts in traditional choice of law rules applicable before the courts. 1422. - Most modem arbitration laws recognize the principle of party autonomy in similar terms.3 1 On the nature of the party autonomy principle, see supra para. 1201 and the references cited. 2 See, e.g., PIERRE LALIVE, JEAN-FRANCOIS POUDRET, CLAUDE REYMOND, LE DROIT DEL'ARBITRAGE INTERNE ET INTERNATIONAL EN SUISSE 392 (I 989). ' See, e.g., Art. 1054 of the Netherlands Code of Civil Procedure (Law of July 2, 1986); Art. 187 of the Swiss Private International Law Statute; Art. 28 of the UNCITRAL Model Law; Sec. 46 of the 1996 English Arbitration Act; Art. 1051( 1) of the German ZPO (Law of Dec. 22, j 997); MARCEL HUYS, GUY KEUTGEN, (continued...).

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 786 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE 1423. - The resolution adopted by the International Law Institute on September 12, 1989 at Santiago de Compostela also endorses the principle, by providing in Article 6 that "[t]he parties have full autonomy to determine the procedural and substantive rules and principles that are to apply in the arbitration."4 1424. - Most of the international conventions which address the issue of the governing law in international commercial arbitration contain similar provisions. 5 1425. - The principle of autonomy also appears in many institutional arbitration rules.6 However, as those rules are only binding by virtue of the intentions of the parties, their restatement of the principle of autonomy amounts to no more than an affirmation by the parties themselves of their own autonomy. Strictly speaking, only national law can provide the basis for party autonomy and determine the conditions and limits within which it can be exercised. That law will be either that of the place of the arbitration, which will generally govern actions to set the award aside, or the laws of all the jurisdictions willing to recognize an award which has given effect to the parties' choice of applicable law.7 Nevertheless, the fact that the main international conventions on the recognition of arbitral awards prevent the courts from reviewing the merits of disputes has furthered the development of private 1 (...continued) L 'ARBITRAGE EN DROIT BELGE ET INTERNATIONAL iii! 796 et seq. ( I 98I); ALAN REDFERN AND MARTIN HUNTER, INTERNATIONAL COMMERCIAL ARBITRATION 97 et seq. (2d ed. 1991); MAURO RUBINO-SAMMARTANO, INTERNATIONAL ARBITRATION LAW (1990); ARBITRATION IN SPAIN 122 et seq. (B. Cremades ed., 1991); J. STEWART MCCLENDON AND ROSABEL E. EVERARD GOODMAN, INTERNATIONAL COMMERCIAL ARBITRATION INNEW YORK I 14 et seq. (1986); Delia Revoredo de Mur, Law Applicable to International Contracts in Latin America, in !CCA CONGRESS SERJES No. 7, PLANNING EFFICIENT ARBITRATION PROCEEDINGS/THE LAW APPLICABLE IN INTERNATIONAL ARBITRATION 501 (A.J. van den Berg ed., 1996). But see, on the mandatory application to arbitration proceedings taking place in certain Arab countries of the law of the place of performance of the contract or of the place of arbitration, ABDUL HAMID EL-AHDAB, ARBITRATION WITH THE ARAB COUNTRJES (2d ed. I 999); RUBINO-SAMMARTANO,supra at 263. On the question of the applicable law in international commercial arbitration in general, see JULIAN D.M. LEW, APPLICABLE LAW IN INTERNATIONAL COMMERCIAL ARBITRATION -A STUDY IN COMMERCIAL ARBITRATION AWARDS (I 978); Marc Blessing, Choice of Substantive Law in International Arbitration, 14 J. INT'L ARB. 39 (June 1997). 4 Resolution on Arbitration Between States, State Enterprises or State Entities, and Foreign Enterprises, XVI Y.B. COM. ARB. 236,238 (1991), and observations by A.T. von Mehren at 233; for the French version, see 1990 REV. ARB. 933. See also the references cited infra para. 1446. 5 See Art. VII of the 1961 European Convention and the commentary by Frederic-Edouard Klein, La Convention europeenne sur /'arbitrage commercial international, 1962 REV. CRJT. DIP 621; P.l. Benjamin, The European Convention on International Commercial Arbitration, 37 BRIT. Y.B. INT'L L. 478 (1961); Art. 42 of the 1965 ICSID Convention. 6 See Art. 17(1) of the 1998 ICC Arbitration Rules (Art. 13(3) of the previous Rules); Art. 33(1) of the UNCITRAL Arbitration Rules; Art. 28 of the 1997 AAA International Arbitration Rules; Art. 22.3 of the 1998 LCIA Rules; Art. 24(1) of the 1999 Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. 7 See Arthur Taylor von Mehren, To what Extent ls International Commercial Arbitration Autonomous?, in LE DROIT DES RELATIONS ECONOMIQUES INTERNA TIONALES - ETUDES OFFERTES A BERTHOLD GOLDMAN 217 (1982)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 787 sources of international arbitration law (such as arbitration rules and arbitral case law), which have tended to strengthen the principle of autonomy.8 1426. - Thus, all these sources must be considered when examining how and when the parties select the applicable law (Section I), the subject matter of their choice (Section II) and the limits on the effectiveness of that choice (Section III). SECTION I FORMULATION AND TIMING OF THE PARTIES' CHOICE OF LAW We shall now discuss how the parties' choice of law must be formulated in order to be effective(§ I) and when that choice can be made(§ 2). § 1. - Formulation of the Parties' Choice of Law 1427. -The parties' choice of applicable law may be express or tacit. Under French law (Art. 1496 of the New Code of Civil Procedure), Swiss law (Art. 187, para. l of the Private International Law Statute) and the UNCITRAL Model Law (Art. 28(1)), for example, there are no particular requirements of form and, provided the parties have made a clear choice, it will be binding on the arbitrators. However, these rules have generated a certain amount of controversy. Unlike a number of international conventions on the law applicable to contracts, modem arbitration statutes do not specify that the parties' choice must "unambiguously result from the provisions of the contract"9 or "be demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case."10 Does this mean that the choice of the law to be applied by the arbitrators must be express,11 or that it can simply be tacit and not result clearly from the terms of the contract or from the circumstances of the case?12 Or does it mean that one should follow a middle path, where evidence as to the intentions of the parties should be ' On private sources of arbitration law, see supra paras. 364 et seq. ' See Art. 2(2) of the Hague Convention of June 15, 1955 on the Law Applicable to International Sales of Goods. w See Art. 3(1) of the Rome Convention of June 19, 1980 on the Law Applicable to Contractual Obligations. 11 See Philippe Fouchard, l 'arbitrage international en France apres le decret du 12 mai 1981, I 09 J.D.l. 374, , 40 at 396-97 (1982). 12 In favor of the latter approach, in the context of Article 187, paragraph I of the Swiss Private International Law Statute, which is similar to Article 1496 of the French New Code of Civil Procedure, see LALIVE, POUDRET, REYMOND, supra note 2, at 389-90..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 788 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE drawn solely from the provisions of the contract?13 In our view, none of these three solutions is satisfactory. There is a clear distinction between the existence of the parties' consent as to the applicable law and the form such consent takes. Virtually no modem arbitration statute contains requirements as to the form of the parties' consent. Consequently, there is nothing to prevent the arbitrators from inferring from the conduct of the parties that there is an implied agreement as to the applicable law where, for example, the parties argue their case on the basis of the same law, even though they have not expressly agreed to apply it.14 However, the parties' intentions must be certain.15 That is a substantive requirement that the arbitrators cannot disregard. 1428. - It is important to note that, in the continental legal tradition, the choice of a place of arbitration cannot, in itself, be considered a choice of applicable law. In contrast, English law has long held the decision to resort to arbitration in England to be, at the very least, a strong indication that English law has been chosen as the applicable law by the parties.16 For example, in a 1968 decision in the Tzortzis and Another v. Monark Line AIB case, 17 the English Court of Appeal held that although the transaction in question had closer links with Sweden, the parties had implicitly chosen English law to govern the contract by agreeing on London as the seat of the arbitration. This position is considered by commentators to remain valid under the 1996 Arbitration Act, which contains no specific provision in this respect.18 In practice, this means that contrary to what happens with respect to Paris or Geneva, for example-where London is chosen as the seat of an arbitration and no further indication is given as to the applicable law, that may be interpreted as an implicit election of English law. Where the ties between jurisdiction and the applicable law lead to the application of a law " See Berthold Goldman, La nouvelle reglementationfranr;:aise de /'arbitrage international, in THE ART OF ARBITRATION - ESSAYS ON INTERNATIONAL ARBITRATION - LIBER AMICORUM PIETER SANDERS 153, 163 (J. Schultz and A.J. van den Berg eds., 1982). 14 Compare ICC Award No. 1434 (1975), in which, in a similar situation, the arbitral tribunal discussed the applicable law at length before deciding that there was an implicit agreement between the parties to apply the law referred to in their pleadings (Multinational group Av. State 8, I 03 J.D.I. 978 (1976), and observations by Y. Derains), and ICC Award No. 2438 (1975), in which a similar conclusion was reached, wrongly, where there was an express agreement between the parties (Spanish company v. French company, I 03 J.D.l. 969 (1976), and observations by Y. Derains). See also the June 27, 1990 Award by AS. El-Kosheri, president, S.K.B. Asante and 8. Goldman, arbitrators (S.K.8. Asante dissenting), in ICSID Case No. ARB/87/3, Asian Agricultural Products Ltd. (AAPL) v. Democratic Socialist Republic of Sri Lanka, which inferred from the positions of the parties during the proceedings an agreement that an investment contract was the principal source of law applicable in the matter (30 l.L.M. 577 (1991); 6 ICSID REV. - FOREIGN INV. L.J. 526 (1991); 6 INT'L ARB. REP. Al (May 1991); XVII Y.8. COM. ARB. 106 (1992); for a French translation, see 119 J.D.l. 2 I 6 (1992), and observations by E. Gaillard). 15 For an example of a choice of law resulting from a reference to general conditions of sale containing a choice oflaw provision, see ICC Award No. 5865 (I 989), Panamanian company v. Finnish company, 125 J.D.I. I 008 (1998), and observations by D. Hascher. 16 See MICHAEL J. MUSTILL, STEWART C. BOYD, COMMERCIAL ARBITRATION 71 (2d ed. 1989). 17 [1968 I All E.R. 949; [1968] I W.L.R. 406; (1968] I Lloyd's Rep. 337 (C.A. 1968). See the remarks of Lord Denning, [1968] I All E.R. 949. 18 See, e.g., RUSSELL ON ARBITRATION 69 et seq. (D. Sutton, J. Kendall, J. Gill eds., 21st ed. 1997)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 789 other than English law, the English courts sometimes feel the need to justify the application of that law on the basis of other considerations, such as the neutrality desired by the parties.19 The Singapore High Court took the same approach in a decision dated September 29, 1995, which made reference to English Iaw.20 Similar ties between jurisdiction and the applicable law are found in some arbitration rules. For example, by submitting to the Hamburg Friendly Arbitration Rules, and in the absence of an indication to the contrary as to the governing law, the parties will be deemed to have chosen German law.21 This is an example of a choice of law made by reference, which is generally held to be valid.22 Contemporary international arbitration practice tends to give less importance to the choice of the seat of arbitration. In an award made in Paris in 1976 in ICC Case No. 2735, it was considered that the choice of applicable law could be inferred from the determination of the seat of the arbitration. 23 By contrast, a 1988 award made in London in ICC Case No. 5717 rightly stated, with regard to the law applicable to the merits of the case and despite an awkward reference to the "agreement to arbitrate," that: [t]he choice of London as the place of arbitration and English as the language of the contract does not, in itself, indicate an intention of the parties that English law should govern the validity of the agreement to arbitrate.24 In practice, it is always in the parties' interest to specify the applicable law as clearly as possible in their arbitration agreement, so as to avoid difficulties of the kind discussed above. ''' See, for example, the reasoning of the Court of Appeal in an oil and gas case between a German company on the one hand and a United Arab Emirates company and an English company on the other hand, concerning an arbitration taking place in Switzerland. The Court considered that the choice by the parties of a neutral forum implied that they also intended that a neutral law (held to be Swiss law) would apply (Deutsche Schachtbau-und Tietbohrgesellschaft mbH v. Ras Al Khaimah National Oil Co., [1990] A.C. 295; [1987] 2 All E.R. 769; [1987] 3 W.L.R. 1023; [1987] 2 Lloyd's Rep. 246; XIII Y.B COM. ARB. 522 (1988)). On the limits to this reasoning where the seat is chosen by the defendant exercising its option to that effect, see Star Shipping AS. v. China National Foreign Trade Transportation Corp. (The "Star Texas"), [1993] 2 Lloyd's Rep. 445; XXII Y.B. COM. ARB. 815 (1997) (C.A. 1993). On this issue, see Ole Lando, The Law Applicable to the Merits of the Dispute, in ESSAYS ON INTERNATIONAL COMMERCIAL ARBITRATION 129, 135 et seq. (P. Sarcevic ed., 1989). w Hainam Machinery Import and Export Corp. v. Donald & McArthy Pte Ltd., XXII Y.B. COM. ARB. 771, 778 (1997). 21 See OTTOARNDT GLOSSNER, COMMERCIAL ARBITRATION IN THE FEDERAL REPUBLIC OF GERMANY 27 and 63 (1984). Similarly, the standard European Contract for Coffee contains a provision under which the choice of the place of arbitration also constitutes a choice of the law of the seat as that governing the merits of the dispute (see the March 19, 1987 Award under the aegis of the Arbitration Court of the Gennan Coffee Association, U.S. buyer v. U.K. seller, XIX Y.B. COM. ARB. 44 (I 994)). 22 For an example of the validation of a choice of law carried out by reference to a standard fonn contract, see ICC Award No. 5865 (1989), supra note 15. 21 ICC Award No. 2735 (1976), Yugoslavian seller v. U.S. purchaser, 104 J.D.I. 947 (1977), and observations by Y. Derains. 24 ICC BULLETIN, Vol. 1, No. 2, at22 (1990)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 790 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE 1429. -The choice of applicable law made by the parties is generally taken to mean the designation of the internal provisions of that law, to the exclusion of its choice of law rules. In continental legal systems at least, that exclusion has long been recognized in contract law.25 This position has prevailed in international arbitration law, as demonstrated by Article 28, paragraph I of the UNCITRAL Model Law: Any designation of the law or legal system of a given State shall be construed, unless otherwise expressed, as directly referring to the substantive law of that State and not to its conflict of laws rules. The same rule is found in Section 46(2) of the 1996 English Arbitration Act.26 Of course, the arbitrators are not prevented from considering whether the parties' choice of applicable law covers all of the disputed subject-matter or merely the main contract from which the dispute has arisen. In the latter case, the arbitrators will be free to determine, whether by using choice of law rules or not, the law applicable to other aspects of the dispute (such as agency or tortious liability).27 § 2. - The Timing of the Parties' Choice of Law 1430. - It is settled law that the parties can choose the applicable law not only at the time of signing the arbitration agreement but also at any other time before or after the dispute has arisen. The drafting of a submission agreement or terms of reference may provide an opportunity for the parties to reach an agreement on this issue. In addition, concurring written submissions by the parties concerning the applicable law would be equally binding on the arbitrators.28 This view is widely accepted in comparative law.29 25 See, e.g., HENRI BATIFFOL AND PAUL LAGARDE, DROIT INTERNATIONAL PRIVE, Vol. 1, i! 311 at 509 (8th ed. 1993); PIERRE MAYER, DROIT INTERNATIONAL PRIVE i! 706 (6th ed. 1998); Art. 15 of the June 19, 1980 Rome Convention on the Law Applicable to Contractual Obligations. But see, in the United States, RESTATEMENT (SECOND) OF CONFLICTS OF LAWS§ 8(2)-(3) (1971). 26 See also ICC Award No. 5505 (1987), Buyer from Mozambique v. Seller from the Netherlands, XIII Y.B. COM. ARB. II 0, 117 (I 988). But see ICC Award No. 1704 (1977), French bank v. Indian company, 105 J.D.I. 977 (1978), and observations by Y. Derains. 27 See infra paras. 1537 et seq. " In favor of the validity of a choice after the dispute has arisen, see, for example, Yves Derains, L'ordre public et le droit applicable au fond du litige dans I'arbitrage international, 1986 REV. ARB. 375, 392. See also the references cited supra para. 1427. 29 See, e.g., HUYS AND KEUTGEN, supra note 3, at 579 and ICC Awards No. 1026 (1962) and 1525 (1969), unpublished, cited by these authors. See also the December 17, 1975 Award by the Court of Arbitration of the Bulgarian Chamber of Commerce and Industry, Bulgarian State enterprise v. State enterprise from the German Democratic Republic, IV Y.B. COM. ARB. 192 (1979); ANDREAS BUCHER, PIERRE-YVES TSCHANZ, INTERNATIONAL ARBITRATION IN SWITZERLAND i! 200 (I 988). But see, on the questionable conclusion that a choice oflaw made during the arbitral proceedings is "less mandatory" than an earlier choice oflaw, the reasons of the first instance court cited in the decision of the German BundesgerichtshofofSeptember 26, 1985, 1986 (continued...).

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 791 SECTION II THE SUBJECT MATTER OF THE PARTIES' CHOICE 1431. - In 1981, the French legislature deliberately chose to refer to "rules of law" rather than to "law" in describing the subject-matter of the parties' choice with respect to the merits of the dispute.30 It was followed in this respect by several modem arbitration statutes31 and by the major institutional arbitration rules.32 The expression "rules oflaw" is intended to signal that the parties may choose not only a national law, with the different nuances that might entail (§ 1), but also, if they see fit, transnational rules, often referred to as lex mercatoria (§ 2). The parties can also empower the arbitrators to act as amiables compositeurs33 (§ 3). § 1. - National Laws 1432. - In international arbitration, as in private international law, the word "law" encompasses all rules belonging to the legal system in question, with each source (including statute, case law and custom) having the authority attributed to it by that legal system. Thus, for example, by referring to "Venezuelan law," the parties include all of the sources recognized by the Venezuelan legal system, following the hierarchy established therein. 1433. - Some choice of law clauses are more difficult to construe. Sometimes, for example, the parties refer without further indication to the law of a federal state. If contract law in that country is governed by federal law, as is the case in Switzerland, the absence of any further indication in the clause is of no consequence. Indeed, it is preferable to submit a contract to "Swiss law" rather than to the law of a particular canton. 34 However, if contract law in the chosen legal system is a matter of state law rather than federal law, the clause 29 ( .... continued) BULL. ASA 153, 154. '" Art. 1496 of the New Code of Civil Procedure. " See, e.g., Art. 28 of the UNCITRAL Model Law; Art. 1054 of the Netherlands Code of Civil Procedure; Art. 187 of the Swiss Private International Law Statute; Art. I 051 of the German ZPO (in force as of January I, 1998) and the discussion infra para. 1444. 12 See Art. 17 of the 1998 ICC Arbitration Rules. For a commentary, see YVES DERAINS AND ERIC A. SCHWARTZ, A GUIDE TO THE NEW ICC RULES OF ARBITRATION 217 et seq. (1998). See also Article 28(1) of the 1997 AAA International Arbitration Rules, which requires the tribunal to "apply the substantive law(s) or rules of law designated by the parties as applicable to the dispute," and Article 22.3 of the 1998 LCIA Rules according to which "the arbitral tribunal shall decide the parties' dispute in accordance with the law(s) or rules of law chosen by the parties as applicable to the merits of their dispute;" Art. 24(1) of the 1999 Rules of the Stockholm Chamber of Commerce. " See, e.g., Art. 1497 of the French New Code of Civil Procedure. 14 On the effect of such a provision, particularly with respect to public law, see Blaise Knapp, Le droit suisse est applicable au present contra/, in ETUDES DE DROIT INTERNATIONAL EN L'HONNEUR DE PIERRE LALIVE 81 (1993)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 792 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE becomes difficult to interpret. This is the case, for example, with clauses submitting a contract to "U.S. law." In such a situation, the arbitrators must determine which of the various state laws will govern the contract, first by interpreting the intentions of the parties, as an intention has been expressed, and only then by resorting to the methods which they would have used to determine the applicable law in the absence of any choice whatsoever, which often means leaving the matter entirely to the discretion of the arbitrators.35 The same difficulties are encountered with clauses referring to "British law," which might mean English or Scots law, or to "the law of the member states of the European Community."36 Other contracts contain contradictory governing law clauses. In ICC Case No. 5864, the arbitral tribunal had to reconcile a clause that referred to Libyan law and custom with a second that referred to the law with the closest connection to the case and custom. The tribunal found that in both clauses the parties intended Libyan law to apply, supplemented by custom where no provision of Libyan law was applicable.37 1434. - Leaving aside these issues of interpretation, the parties' freedom in choosing a national law is virtually unfettered. International arbitration law, as expressed in international conventions, comparative law and arbitral practice, reinforces the parties' autonomy, which was already widely recognized in the private international law of contract.38 The parties may choose a "neutral" law, with no connection with the dispute (A), or they may choose several national laws, using the technique of depe<;age (B). They may decide to stabilize their chosen law at a particular point in time (C) or they may even choose a law which partly or entirely renders the contract in question void (D). However, in our opinion, the parties cannot choose to have their contract governed by no rules of law at all (E). A. - CHOICE OF A NEUTRAL LAW 1435. - Historically, in order for the parties' choice of law to be valid under the private international law of contract, the chosen law had to have an objective connection with the 15 See infra paras. 1537 et seq. 16 See, for example, ICC Award No. 7319 (1992), which held such a choice to be valid, provided that it was supplemented by the law of a member state, determined according to the ordinary choice of law method (cited in ICC BULLETIN, SPECIAL SUPPLEMENT, INTERNATJONAL COMMERCIAL ARBITRATION IN EUROPE 41 (1994)). The application of principles common to the members of the European Community might have been more in keeping with the intentions of the parties; see infra para. 1447. 17 ICC Award No. 5864 (1989), U.S. company v. Libyan company, 124 J.D.I. 1073 (1997), and observations by Y. Derains. " See, e.g., Art. 3 ofthe June 19, 1980 Rome Convention on the Law Applicable to Contractual Obligations..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 793 substance of the contract. In other words, the parties could not choose a law having no connection with the dispute.39 In contemporary international arbitration law, that approach has generally been abandoned.40 The emphasis today is on the need to allow the parties to choose a neutral law or, in other words, a law which has no connection with either the parties or the subject- matter of the contract.41 Thus, for example, Swedish law was often chosen, because of Sweden's neutrality, to govern contracts between Western corporations and state-owned entities in the USSR or communist China. Swiss law is sometimes chosen for similar reasons. In fact, parties have a variety of different reasons for choosing neutral laws, although that choice is frequently based on considerations which are more political than legal. Nevertheless, prior to reaching their agreement, the parties will sometimes conduct a comparative law analysis.42 Another approach, which is more intuitive but probably more appropriate than a choice based solely on political considerations, is for each party to attempt to impose an applicable law drawn from a legal system similar to that party's own.43 Whatever the parties' reasons may be, a choice of a law which is objectively unconnected with the contract is undoubtedly valid in most legal systems. This is certainly the case under Article 1496 of the French New Code of Civil Procedure. It has also consistently been recognized in arbitral case law.44 w See, in the United States, RESTATEMENT (SECOND) OF CONFLICTS OF LAWS § 187 (I 971) which still requires a substantial relationship between the transaction or the parties and the law chosen, unless there is another reasonable basis for the parties' choice. 4° Compare with the approach of the June 19, I 980 Rome Convention on the Law Applicable to Contractual Obligations, which also requires no connection with the dispute (Art. 3) (see also Giuliano and Lagarde Report, 1973 RIV. DIR. INT. E PROC. 217). 41 See, e.g., RENE DAVID, ARBITRATION IN INTERNATIONAL TRADE, 388 (1985); MATTHIEU DE BOISSESON, LE DROIT FRANCAIS DEL'ARBITRAGE INTERNE ET INTERNATIONAL 597 (2d ed. 1990); RUBINO-SAMMARTANO, supra note 3, at 253; LALIVE, POUDRET, REYMOND, supra note 2, at 393; Lando, supra note 19, at 134; compare the more reserved position of HUYS AND KEUTGEN, supra note 3, at 597 and of Article 62 of the Spanish Law 36/1988 on Arbitration of December 5, 1988, according to which "the arbitrators shall decide according to the law expressly chosen by the parties, provided that it has some connection with the main legal transaction or with the dispute." See also the commentary in ARBITRATION IN SPAIN, supra note 3, at 122. 42 See Emmanuel Gaillard, The Use of Comparative Law in International Commercial Arbitration, in ICCA CONGRESS SERIES NO. 4, ARBITRATION IN SETTLEMENT OF INTERNATIONAL COMMERCIAL DISPUTES INVOLYING THE FAR EAST AND ARBITRATION IN COMBINED TRANSPORTATION 283 (P. Sanders ed., 1989). 4 • 1 On the parties' reasons for their decisions as to the choice of applicable law, see also Yves Derains, The ICC Arbitral Process - Part VIII: Choice of the Law Applicable to the Contract and International Arbitration, ICC BULLETIN, Vol. 6, No. I, at 10 (1995). 44 On the possibility for arbitrators to apply a law with no connection to the dispute (in this case Swiss law), see, for example, ICC Award No. 1598 (1971), Danish party v. Bulgarian and Ethiopian parties, III Y.B. COM. ARB. 216 (1978); see also, on the validity of the choice of Swiss law in a contract with no connection to Switzerland, ICC Award No. 4629 (Paris, 1989), Contractors v. Owner, XVlll Y.B. COM. ARB. 11 (1993), especially, 7 at 16..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 794 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE B. - CHOICE OF SEVERAL LAWS (DEPE<;AGE) 1436. -The parties may also wish to choose different laws to govern different aspects of disputes which may arise between them. This situation, which is known as "depet;age," should not be confused with the situation where the parties declare that principles common to several laws apply.45 Applying different laws to different aspects of a dispute is becoming increasingly accepted, even before the courts. In the European Union, Article 3, paragraph 1 of the 1980 Rome Convention on the Law Applicable to Contractual Obligations enables the parties to opt for several laws to be applied selectively to different "parts" of an international contract. There is no doubt that such a choice by the parties would be validated by international arbitrators. By allowing the parties to choose the applicable "rules of law," modem statutes on arbitration46 clearly validate such a choice, and it is not even necessary to justify that choice by establishing that certain "parts" of the contract can be distinguished. Thus, for example, the Aramco award allowed depet;age on the basis that: [s]ince the Parties themselves declared that the Concession was not to be governed by a single law, the Tribunal can justifiably split the contract into parts, to be governed by several laws.47 The International Law Institute has also endorsed this approach. In its resolution adopted in Athens in September 1979, it suggested, specifically in connection with state contracts but in terms which are of general application, that "[t]he parties may choose as the proper law of the contract ... one or several domestic legal systems . . . ."48 The Institute subsequently expressed the rule in general terms in Article 6 of its resolution adopted in Santiago de Compostela on September 12, 1989: "[t]he parties have full autonomy to determine the procedural and substantive rules and principles that are to apply in the 45 See infra para. 1457. 46 See supra para. 1431. 47 Aug. 23, 1958 ad hoc Award by G. Sauser-Hall, referee, M. Hassan and S. Habachy, arbitrators, Saudi Arabia v. Arabian American Oil Co. (ARAMCO), 27 INT'L L. REP. 117, 166 (1963); for a French translation, see 1963 REV. CRIT. DIP 272, 313. See also the references cited supra para. 1173. 48 Article 2 of the Resolution on The Proper Law of the Contract in Agreements between a State and a Foreign Private Person, in INSTITUT DE DROIT INTERNATIONAL, TABLEAU DES RESOLUTIONS ADOPTEES (1957-1991), at 332,333 (1992); 1980 REV. CRIT. DIP 427..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 795 arbitration."49 Several arbitration rules have expressly recognized that parties may agree to depe9age by requiring the arbitrators to apply "the law(s)" chosen by the parties.50 However, the fact that depe9age is valid does not mean that it is necessarily appropriate. A multiplicity of applicable laws is liable to create unnecessary disputes over the scope of each, and may generate inconsistencies or imbalances as a result of their juxtaposition. C. - CHOICE OF A STABILIZED LAW 1437. - Stabilization clauses-which in effect freeze the content of the applicable law at a particular point in time-have given rise to a wealth of commentary in the context of state contracts. 51 When negotiating with a state, the private party will often feel the need to protect itself from the legislative power of its contractual partner. As the state usually insists on submitting the contract to its own law, the parties frequently adopt a compromise position whereby the contract is submitted to the law of that state as it stands at a particular point in time, which is generally the date the contract is signed. It is true that, in any event, if a state were to use its sovereign powers to enact new legislation in order to improve its contractual 49 Supra note 4 and the references cited infra para. 1446. On the question of deper;:age, see also Jean-Flavien Lalive, Con/rats en/re Etats ou en/reprises etatiques et personnes privees - Deve/oppements recenls, in COLLECTED COURSES OF THE HAGUE ACADEMY OF INTERNATIONAL LAW, Vol. 181, Year 1983, Part III, at 49; Craig M. Gertz, The Selection Of Choice Of Law Provisions In International Commercial Arbitration: A Case For Contractual Depe,;:age, 12 Nw. J. INT'L L. & Bus. 163 (1991). 50 See Art. 28(1) of the 1997 AAA International Arbitration Rules, Art. 22.3 of the 1998 LCIA Rules or Art. 24(1) of the 1999 Rules of the Stockholm Chamber of Commerce. Although they do not use this language, the 1998 ICC Rules also endorse this approach by enabling the parties to choose the "rules of law" to be applied by the arbitral tribunal (Art. 17(1)). See supra para. 1431. 51 See Bernard Audit, Transnational Arbitration and Stale Contracts: Findings and Prospects, in THE HAGUE ACADEMY OF INTERNATIONAL LAW, CENTRE FOR STUDIES AND RESEARCH IN INTERNATIONAL LAW AND INTERNATIONAL RELATIONS, TRANSNATIONAL ARBITRATION AND STATE CONTRACTS (in the French version at 23 and in an English translation at 77 ( 1988)); Nicolas David, Les clauses de stabilite dans /es con/rats petroliers. Questions d'un praticien, 113 J.D.I. 79 (1986); JEAN-MICHEL JACQUET, PRJNCIPE D' AUTONOMIE ET CONTRA TS INTERNATIONAUX ,i,i 176 et seq. (1983); Philippe Kahn, Con/rats d'Etal el nationalisation - Les apports de la sentence arbitrale du 24 mars 1982, I 09 J.D.I. 844 (1982); Jean-Flavien Lalive, Un grand arbitrage petrolier entre un Gouvernement et dew: societes privees etrangeres (Arbitrage Texaco/Caliastic cl Gouvernemen/ libyen), 104 J.O.1. 319 (1977); PHILIPPE LEBOULANGER, LES CONTRATS ENTRE ETATS ET ENTREPRISES ETRANGERES ( 1985); Pierre Mayer, la neutralisation du pouvoir normatif de I'Eta/ en matiere de con/rats d'Etat, 113 J.D.I. 5 (1986); Brigitte Stem, Trois arbitrages, un meme probleme, trois solutions - Les nationalisations petro/ieres libyennes devant /'arbitrage international, 1980 REV. ARB. 3; Prosper Weil, Les clauses de stabilisation ou d'intangibilite inserees dans /es accords de developpement economique, in MELANGES OFFERTS A CHARLES ROUSSEAU - LA COMMUNAUTE INTERNATIONALE 301 (1974); Nigel Rawding, Protecting Investments Under Stale Contracts: Some legal and Ethical Issues, 11 ARB. INT'L 341, 346 et seq. (I 995); Wolfgang Peter, Stabilization Clauses in State Contracts/Les clauses de stabilisation dans /es contrats d'Etat, 1998 INT'L Bus. L.J. 875; Charles Leben, Re/our sur la notion de con/rat d'Etat el sur le droil applicable a celui-ci, in MELANGES 0FFERTS A HUBERT THIERRY- L'EV0LUTION DU DROIT INTERNATIONAL 247 (1998). See also the clauses cited by Georges R. Delaume, L'affaire du Plateau des Pyramides et le C!RDJ. Considerations sur le droit applicable, 1994 REv. ARB. 39, 42; Georges R Delaume, The Proper law of State Contracts Revisited, 12 ICSID REV. - FOREIGN INV. L.J. I (I 997)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 796 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE position, that may be characterized as an abuse of its powers and contested as such.52 However, incorporating a clause freezing the applicable law remains the best guarantee for the private party that its rights under the contract cannot be unilaterally altered by the state. It has sometimes been considered necessary to distinguish between stabilization clauses, which are intended to freeze the applicable legislation, and "intangibility" clauses.53 However, the distinction appears to make no significant difference to the regime governing the contract. The validity of stabilization clauses has traditionally been examined primarily from a public international law standpoint. In particular, is the abdication of legislative power which they entail compatible with the principles governing state sovereignty?54 The answer is generally in the affirmative, on the basis that such clauses do not prevent the state from legislating, but merely enable a particular contract to avoid the effects of that legislation. It has also been suggested, somewhat tautologically, that a state's sovereignty provides sufficient justification for the irrevocable waiver of some its powers.55 Arbitral case law generally validates stabilization clauses.56 The International Law Institute has also affirmed, in Article 3 of its 1979 resolution, that "[t]he parties may agree that domestic law provisions referred to in the contract shall be considered as being those in force at the time of conclusion of the contract."57 52 On this issue, see especially E. Gaillard, observations following the November 20, 1984 Award in ICSID Case No. ARB/81/1, Amco Asia Corp. v. Republic of Indonesia, 114 J.D.I. 145, 161 (1987), and observations following the June 5, 1990 ICSID award in Amco, 118 J.D.I. 186 (1991). 51 See, e.g., Weil, supra note 51. 54 See Fram;ois Rigaux, Des dieux: et des heros - Reflexions sur une sentence arbitrale, 1978 REV. CR!T. DIP 435; Wilhelm Wengler, Les principes generaux: du droit en tant que loi du contrat, 1982 REV. CRJT. DIP 467, especially at 490 et seq.; Eduardo Jimenez de Arechaga, International Law in the Past Third of a Century, in COLLECTED COURSES OF THE HAGUE ACADEMY OF INTERNATIONAL LAW, Vol. 159, Year 1978, Part I, at 9. 55 For an approach that places significant emphasis on the will of the state, see, for example, MAMOUDOU DEME, QUALITE DES PARTIES ET CONTRAT D'ETAT (Thesis, University of Rouen (France), 1993). 56 See, for example, the January 19, 1977 Award by R.-J. Dupuy, sole arbitrator, Texaco Overseas Petroleum Co./ California Asiatic Oil Co. v. Government of the Libyan Arab Republic, 104 J.D.I. 350 (1977), ,r,r 69 et seq., and the commentary by Lalive, supra note 51; for an English translation, see 17 I.L.M. 1 (1978); 53 INT'L L. REP. 389 (1979); IV Y.B. COM. ARB. 177 (1980); the March 24, 1982 ad hoc Award by P. Reuter, president, H. Sultan and G. Fitzmaurice, arbitrators, The Government of the State of Kuwait v. The American Independent Oil Co. (AMINOIL), 21 I.L.M. 976 (1982); IX Y.B. COM. ARB. 71 (1984); for a French translation, see 109 J.D.I. 869 (1982), ,r,r 83 et seq., and the commentary by Kahn, supra note 51; the November 30, 1979 Award by J. Trolle, president, R.-J. Dupuy and F. Rouhani, arbitrators, in ICSID Case No. ARB/77/1, AGIP S.p.A. v. Government of the People's Republic of the Congo, 1982 REV. CRIT. DIP 92, and H. Batiffol's note; for an English translation, see 21 I.L.M. 726 (1982); VIII Y.B. COM. ARB. 133 (1983); 1 ICSID REP. 306 (1993); the March 31, 1986 Award by B. Cremades, president, J. Goncalves Pereira and A. Redfern, arbitrators, in ICSID Case No. ARB/83/2, Liberian Eastern Timber Corp. v. Government of the Republic of Liberia, 26 I.L.M. 647 (1987); XIII Y.B. COM. ARB. 35 (1988); 2 ICSID REP. 346 (1994); for a French translation, see 115 J.D.I. 166 (1988), and observations by E. Gaillard; the January 14, 1982 ad hoc Preliminary Award by B. Gomard, sole arbitrator, Elf Aquitaine Iran v. National Iranian Oil Co. (NIOC), XI Y.B. COM. ARB. 97 (1986); for a French translation, see 1984 REV. ARB. 401, and the observations by Philippe Fouchard, L'arbitrage Elf Aquitaine Iran cl National Iranian Oil Company- Une nouvelle contribution au,droit international de /'arbitrage, id. at 333. 57 Supra note 48, at 334..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 797 1438. - Clauses stabilizing the applicable law can also be found in contracts that do not involve states, where they provide the parties with the certainty that, at the time they sign the contract, they know-or can ascertain-the content of the law governing that contract. In traditional private international law thinking, doubts remain as to the validity of clauses freezing the applicable law.58 Admittedly, the courts have had little opportunity to address the issue, as stabilization clauses are usually found in contracts containing an arbitration clause, as a result of which most of the relevant litigation is heard by arbitral tribunals. When the issue arises in arbitration, the general trend is, as indicated above, 59 to admit the validity of such clauses, whether or not they appear in a state contract. Even in the absence of a stabilization clause, one arbitral tribunal considered, admittedly applying transitional provisions of the law chosen by the parties, that it should apply the law as it stood at the time the contract was signed.60 This would be all the more appropriate where there is a stabilization clause.61 As the law governing the merits of the dispute is not a matter that can be reviewed by the courts,62 there is nothing in modem arbitration legislation enabling a court confronted with the issue-in the context of an action to set aside the award, for example-to question the validity of an award giving effect to a stabilization clause. D. - CHOICE OF A LAW WHICH RENDERS THE CONTRACT VOID 1439. - It has sometimes been argued that the parties cannot, without contradicting themselves, choose a law the application of which leads all or part of their contract to be void. As the parties cannot have intended to conclude an invalid contract, the argument goes, they cannot have chosen a law which causes it to be void, even in part. That reasoning, which is sometimes made before the courts,63 may seem more convincing before an arbitral tribunal, as arbitrators themselves derive their power from a contract between the parties.64 However, the argument should, in our view, be rejected. It is based on a mistaken conception of the intention of the parties when choosing the applicable law. When entering into a contract, the parties seek to place themselves under the general protection of a legal system '" See MAYER, supra note 25, 708. 59 See supra note 56. 60 See, e.g., ICC Award No. 3093 (1979), Primary Coal v. Compania Valenciana, 107 J.D.I. 951 (1980), and observations by Y. Derains. "' In favor of the validity of clauses stabilizing the applicable law, see, for example, Derains, supra note 28, at 390; but see, for a criticism of such clauses based on their "unrealistic" character, REDFERN AND HUNTER, supra note 3, at I 05 and 121. 62 See irifra para. 1603. 63 See, in the United States, RESTATEMENT (SECOND) OF CONFLICT OF LAWS§ 187, Comment b (1971). 64 See Y. Derains, observations following ICC Award No. 5953 (1989), U.S. company v. Spanish company, 117 JD.I. 1056, 1062 (1990). Compare, in the case ofa pathological clause where the parties chose two laws, one of which caused the agreement to be void, ICC Award No. 4145 (1984), Establishment of Middle East country v. South Asian construction company, XII Y.B. COM. ARB. 97 (1987); for a French translation, see 112 J.D.I. 985 (1985), and observations by Y. Derains..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 798 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE which they trust, admittedly without always being familiar with its content, to resolve all difficulties which are liable to arise in connection with their contract. If resolving those difficulties entails having a provision of the contract declared void (an overly-restrictive non-competition clause, for example), or even the entire contract (as in the case where the price is considered to be abusive under applicable regulations), the intentions of the parties are respected by holding the relevant clause or contract to be void.65 Arbitral case law therefore generally considers, and rightly so, that the mandatory provisions of the law chosen by the parties should prevail over the terms of the contract.66 While approving of that approach, some authors have suggested that the situation is different where the contract itself provides that in the event of a conflict between the applicable law and the terms of the contract, the latter shall prevail.67 Such clauses are now sometimes included in international contracts.68 In such a case, the parties intend that the provisions of their contract should not be invalidated by the law that they choose to govern the contract. However, the parties' intention that certain contractual clauses should evade the application of provisions of the governing law will not necessarily be effective. As a result of the intention of the parties, clauses conflicting with the chosen law will no longer be governed by any law. Thus, if one were to give full effect to the parties' intentions, part of the contract would have no governing law. As we shall see, this option is not available to the parties.69 The arbitrators will therefore have to determine, by reference to the rules which they would apply in the absence of any choice of law, the rules of law governing 65 On this issue, see Emmanuel Gaillard, La distinction des principes generaia: du droit et des usages du commerce international, in ETUDES OFFERTES A PIERRE BELLET 203,213 (1991). 66 See, e.g., ICC Award No. 2119 (1978), Dutch company v. French shipyard, 106 J.D.I. 997 (1979), and observations by Y. Derains. But see, for a case where, despite the choice by the parties of French law to govern their dispute, arbitrators did not apply Article 14 of the French law of December 31, 1975 on subcontracts, which holds subcontracts void if certain conditions are not met, ICC Award No. 7528 (1994), Sub-contractor v. Contractor, XXII Y.B. COM. ARB. 125 (I 997), and comments by Ibrahim Fadlallah, L'ordre public dans !es sentences arbitrates, in COLLECTED COURSES OF THE HAGUE ACADEMY OF INTERNATIONAL LAW, Vol. 249, Year 1994, Part V, 75. The arbitral tribunal based its decision on the will of the parties, as they were held to have elected to apply French contract law other than this particular statute. See also infra para. 1527. 67 See Derains, supra note 28, at 390 et seq.; DE BOISSES0N, supra note 41, at 600. 68 See, for example, the clause that gave rise to ICC Case No. 6257, which stated that the applicable law was "French law, subject to the explicit exceptions contained in this contract" (unpublished), or the clause that gave rise to ICC Case No. 6136, which provided that "to the extent that they are not contrary to the provisions of this contract ... and the present transaction, the following shall apply in this order [general principles of law and the law of the state in which the contract was to be performed]" (unpublished). See also the clause pursuant to which the arbitrators could not apply sources of law other than the contract unless such contract was ambiguous, cited by Delaume, L'ajfaire du Plateau des Pyramides et le CJRDI, supra note 51, at 43; and the clause found in Banque Arabe et Internationale d'Investissement (BAIi) v. The Inter-Arab Investment Guarantee Corp., ad hoc Award ofNovember 17, 1994, 11 INT'LARB. REP. Al, IIatAl4 (Apr. 1996); fora French translation, see 1998 REV. ARB. 211, and F. Horchani's note. 69 See infra para. 1440..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 799 those provisions. 70 It is only where such rules of law lead the contractual clauses at issue to be valid that the arbitrators will be able to salvage them.71 E. - CONTRACTS WITH No GOVERNING LAW 1440. - The considerable freedom enjoyed by the parties and, in the absence of any choice by the parties, by the arbitrators in determining the rules of law governing the merits of a dispute raises a question as to whether the parties can go so far as to stipulate that their contract is self-sufficient and is not governed by any rules oflaw. In current practice, such clauses are very rarely encountered, which tends to indicate that the parties themselves have doubts as to their effectiveness. However, some clauses do attempt, by more or less contrived means, to achieve the same result. In particular, the parties may seek to give the governing law a purely subsidiary role, by specifying that in the event of a conflict between the provisions of that law and those of the contract, the latter are to prevail.72 In such a case, the parties are clearly trying to ensure that the examination of the validity and scope of the contract will be performed, either entirely or in part, without any reference to rules that would otherwise prevail over the contract. This situation is not to be confused with contracts where the parties have opted for the application of general principles of law, or transnational rules of one form or another. 73 In such a case, provided that they do not take an excessively restrictive view of the general principles chosen by the parties,74 arbitrators can indeed examine the validity of the contract, interpret it, or even refuse to give effect to provisions which they consider to be excessive (such as penalty clauses), by applying those principles.75 Although it is governed by no national law, the contract will then have a governing law in the sense that it does not seek to avoid compliance with rules that are hierarchically superior to its own terms. Likewise, a contract with no governing law should not be confused with amiable composition, where the arbitrators can apply their own conception of equity to the parties' contract. Even in the case of amiable composition, the parties' contract will not be self- sufficient.76 70 See infra para. 1538. 71 For reasoning in favor of recognizing the autonomy or separability of the choice oflaw clause in the same way that the arbitration clause is recognized as being autonomous, see ICC Award No. 6476 (1994), ICC BULLETIN, Vol. 7,No.1,at86(1996). 72 See the examples cited supra note 68. 73 On the different types of transnational rules, see infra para. 1457. 74 On the use of transnational rules as a substitute for a contract with no governing law, see infra paras. 1451 et seq. 7; On the content of these principles, see infra paras. 1459 et seq. 76 On the powers of arbitrators acting as amiables compositeurs with respett to the provisions of the contract, see infra para. 1507..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 800 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE 1441. - What attitude should arbitrators take when confronted not with a clause providing for the application of transnational rules or empowering the arbitrators to act as amiable compositeurs, but with a clause purporting to remove the contract from any governing law or rules of law? Two arguments have been put forward in support of the validity of such clauses. The first is based on the idea that the contract itself is a set of rules, and that it therefore qualifies as a "rule of law"77 which the parties can choose to govern their contract.78 That argument is unconvincing in so far as the contract itself only becomes a "rule of law" where a superior rule grants it that legal status. It seems doubtful that by referring to the "rules of law" which the parties can instruct the arbitrators to apply to the merits of the dispute, the various legal systems which validate such a choice intend to confer a status of rule of law on provisions which would not otherwise enjoy such standing.79 The second argument used in international arbitration in favor of contracts with no governing law is based on the nature of international arbitration. The idea is that as the arbitrators derive their powers from the intentions of the parties, they do not need a lex Jori on which to base the binding nature of a contract. Proponents of this theory argue that the intentions of the parties bind the arbitrators and they must uphold them "without seeking to justify that obligation;" they consider that the fact that, in most legal systems, there is no review by the courts of the law applied by the arbitrators provides sufficient justification for the arbitrators to comply with the parties' intention to exclude a governing law.80 However, to pursue that line ofreasoning would amount to giving absolute freedom to the arbitrators,81 and would entitle them just as much to ignore the parties' intention to free their contract from all rules of law as to give effect to it. Besides, however liberal a law may be in the field of international arbitration, there will be more to it than those provisions the breach of which gives rise to an action to set aside or resist enforcement of the award. In most modem arbitration statutes, although it does not appear among the grounds for refusing to enforce or for setting aside an award, there is a specific provision requiring the parties' contract to be governed by "rules of law."82 That requirement is binding on arbitrators even if not expressly constituting grounds on which to set aside or refuse enforcement of an award. 77 These terms are used, for example, in Article 1496 of the French New Code of Civil Procedure, Article 28 of the UNCITRAL Model Law and similar provisions in other modem arbitration statutes. See supra para. 1431. " See JEAN ROBERT, L'ARBITRAGE-DROIT INTERNE-DR0IT INTERNATIONAL PRIVE 1330 at 288 (5th ed. 1983): "the choice may be ... that of contractual rules to the exclusion of a law." This view no longer appears in the 6th edition published in 1993 (1300 at 226). 79 On the case law which acknowledges the legal character of lex mercatoria in terms which accept that such legal character is required for the parties to be able to validly choose lex mercatoria as the governing law under Article 1496 of the French New Code of Civil Procedure, see infra para. 1636. '" MAYER, supra note 25, 1702 at 458. " On the limits to the freedom of the parties and, in consequence, of the arbitrators, and particularly that resulting from international public policy, see infra paras. 1533 et seq. " See, for example, in France, Article 1496 of the New Code ofCivil•Procedure and the corresponding provisions in other modern arbitration statutes cited supra para. 1431..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 801 Thus, in our opinion, the parties' freedom to choose the applicable rules of law does not extend to allowing them to reject the need for the contract to be governed by some rules.83 If faced with a contractual provision inviting them to apply no rule of law to all or part of the dispute which they are to resolve, the arbitrators will nevertheless be at liberty to apply the rules of law they consider to be appropriate, just as if the parties had simply expressed no choice at all.84 ln such cases, one way of giving effect to the parties' intentions, without going so far as to allow contracts with no governing law, would be to apply general principles of law rather than the rules of a particular national law. A careful analysis of awards which state that they accept the theory of contracts with no governing law85 shows that they in fact consider it necessary to apply general principles of law.86 This does not amount to accepting that the contract is self-sufficient and hence free from the effects of any rule of law. 1442. - However, parties may validly agree to exercise a "partial negative choice" according to which the arbitrators are required not to apply certain laws identified in the parties' contract. Such provisions are generally intended to ensure the neutrality of the choice of law vis-a-vis the parties in situations where the parties themselves cannot agree on a particular applicable law. As such, they do not actually prevent the contract from being governed by rules of law. Provided that the clause does not prevent the arbitrators from having the dispute governed by rules oflaw which they are free to choose from the options remaining open to them, the requirement that the contract be governed by some "rules of law" as opposed to being considered self-sufficient will be satisfied. The same is true where the parties choose to have the dispute governed by rules which do not belong to any particular legal system. § 2. - Transnational Rules 1443. - Although the validity of choosing transnational rules to govern an international contract is now widely accepted in international arbitration (A), those rules, often referred to under the heading lex mercatoria,87 continue to be a highly controversial subject (B). However, by examining the method and content of transnational rules we may be able to help dispel some of that controversy (C). "' See, e.g., Lalive, supra note 49, at 45 et seq. "' See infra paras. 1538 et seq. '5 See, e.g., ICC Award No. 2152 (1972), cited by Y. Derains, observations following ICC Award No. 1641 (1969), IOI JD.I. 888,889 (1974). "" On this issue, see infra para. 1443. '7 On the terminology, see infra para. 1447..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 802 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE A. - VALIDITY OF THE CHOICE OF TRANSNATIONAL RULES AS GOVERNING LAW 1444. - Parties sometimes prefer not to have their contract governed by a particular national law, but instead elect to have it governed by transnational rules, which are often referred to collectively, together with trade usages, as lex mercatoria. 88 The freedom enjoyed by the parties to apply such rules is signaled, in contemporary international arbitration, by the use of the words "rules of law" as opposed to "the law" or "laws" when describing the rules which the parties are free to select pursuant to the principle of party autonomy. This terminology was first used by the 1981 French decree on international arbitration, which provided in Article 1496 of the New Code of Civil Procedure that the parties (and, in the absence of a choice by them, the arbitrators)89 were free to select the "rules of law" applicable to their dispute. Commentators were unanimous in recognizing the implicit reference to transnational rules in the text90 and the courts have never questioned that interpretation.91 Several other legal systems have used the same expression with the same meaning. When Article 1054 of the Netherlands Code of Civil Procedure was presented to the legislature in 1986, the Dutch government emphasized in an explanatory memorandum that the expression "rules of law" encompassed not only national rules of law but also lex mercatoria. 92 Likewise, Article 187 of the 1987 Swiss Private International Law Statute provides that "[t]he arbitral tribunal shall decide the case according to the rules of law " See, generally, Berthold Goldman, Frontieres du droit et "lex mercatoria ", in ARCHIVES DE PHILOSOPHIE DU DROIT, VOL. IX, LE DROIT SUBJECTIF EN QUESTION 177 (1964); Berthold Goldman, La lex mercatoria dans /es contrats et I 'arbitrage internationaux: realite et perspectives, I 06 J.D.I. 475 (1979); Berthold Goldman, Nouvelles reflexions sur la Lex Mercatoria, in ETUDES DE DROJT INTERNATIONAL EN L'HONNEUR DE PIERRE LALIVE 241 (I 993); Emmanuel Gaillard, Thirty Years of Lex Mercatoria: Towards the Selective Application of Transnational Rules, IO ICSID REV. - FOREIGN INV. L.J. 208 (1995) and, for the French version, Trente ans de lex mercatoria - Pour une application selective de la methode des principes generaux du droit, 122 J.D.I. 5 (1995); TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION (E. Gaillard ed., ICC Publication No. 480/4, 1993); FELIX DASSER, INTERNATIONALE SCHIEDSGERICHTE UND LEX MERCA TORIA - RECHTSVERGLEICHENDER BEITRAG ZUR DISKUSSION OBER EINNICHTSTAA TLICHES HANDELSRECHT (1989); Jan AS. Paulsson, La Lex Mercatoria dans I'arbitrage C.C.l., 1990 REV. ARB. 55; FILALI OSMAN, LES PRINCIPES GENERAUX DE LA LEXMERCA10RIA-CONTRIBUTION AL 'ETUDE D'UNORDRE JURIDIQUE ANATIONAL (1992); FILIP J.M. DEL Y, INTERNATIONAL BUSINESS LAW AND LEX MERCA TORIA (1992); DOMINIQUE BUREAU, LES SOURCES INFORMELLES DU DROIT DANS LES RELATIONS PRIVEES INTERNATIONALES (Thesis, University of Paris II (France), 1992); Ning Jin, The Status of Lex Mercatoria in International Commercial Arbitration, 7 AM. REV. INT'L ARB. 163 (1996); LEX MERCATORIA AND ARBITRATION (T.E. Carbonneau ed., rev. ed., 1998); KLAUS PETER BERGER, THE CREEPING CODJFICA TION OF THE LEX MERCATORIA ( 1999). 89 On this issue, see infra paras. 1554 et seq. 90 See Fouchard, supra note 11, ,r 39; Goldman, supra note 13, at 164; DE BOJSSESON, supra note 41, ,r 661 at 591; ROBERT, supra note 78, ,r 1440 (who goes as far as suggesting that the parties may be able to choose to have no law govern their contract). On this issue, see the discussion supra para. 1441. 91 See, e.g., CA Paris, June 25, 1993, Schonenberger Systemtechnik GmbH v. S.A. Yens, 1993 REV. ARB. 685, and observations by D. Bureau. 92 See A.V.M. Struycken, La lex mercatoria dans le droit des contrats internationaux, in L'EVOLUTION CONTEMPORAINE DU DROIT DES CONTRATS - JOURNEES RENEE SAVATIER, POJTIERS, 24-25 OCTOBRE 1985, at 207, 227 ( 1986)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 803 chosen by the parties," thus giving the parties the option of applying lex mercatoria, in one form or another.93 A large number of laws, including those ofltaly,94 Egypt,95 Mexico96 and Germany97 followed suit.98 This is largely due to the fact that, in 1985, the UNCITRAL Model Law embraced the trend by providing in its Article 28 that "the arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties99 as applicable to the substance of the dispute." Some authors have argued, rather curiously, that the expression "rules of law" found in the UNCITRAL Model Law covers certain transnational rules, such as international conventions, but that it is not intended to enable the parties to submit their dispute to general principles of law or to lex mercatoria. 100 However, neither the terminology employed, nor the Model Law's travaux preparatoires justify such a restrictive interpretation.101 91 See LALIYE, POUDRET, REYMOND, supra note 2, at 393; BUCHER AND TSCHANZ, supra note 29, 11211 et seq.; Marc Blessing, The New International Arbitration Law in Switzerland - A Significant Step Towards Liberalism, 5 J. INT'L ARB. 9, 60 (June 1988); Pierre Lalive and Emmanuel Gaillard, Le nouveau droit de /'arbitrage international en Suisse, 116 J.D.I. 905,945 (1989). '1' See Art. 834 of the Italian Code of Civil Procedure, as amended by Law No. 25 of January 5, 1994, and the commentary by Piero Bernardini, L'arbitrage en ltalie apres la recente reforme, 1994 REV. ARB. 479, 492. See also Piero Bernardini, Italy, in ICCA INTERNATIONAL HANDBOOK ON COMMERCIAL ARBITRATION (forthcoming in 1999). 95 See Art. 39 of Egyptian Law No. 27 of 1994 Promulgating the Law Concerning Arbitration in Civil and Commercial Matters, and the commentary by Bernard Fillion-Dufouleur and Philippe Leboulanger, Le nouveau droit egyptien de /'arbitrage, 1994 REV. ARB. 665, 678. % See Art. 1445(2) of the Mexican Law on Arbitration of July 22, 1993. 97 See Art. 1051 of the ZPO, in force as of January I, 1998. " See also Art. 813 of the 1983 Lebanese New Code of Civil Procedure, and the commentary by Marie Sfeir-Slim, Le nouveau droit libanais de !'arbitrage a dix ans, 1993 REY. ARB. 543, 589; Abdul Hamid EI-Ahdab, The Lebanese Arbitration Act, 13 J. INT'L ARB. 39, 93 (Sept. 1996); Art. 458 bis 14 of the Algerian Code of Civil Procedure (Legislative Decree No. 93-09 of 1993), and the commentary by Mohand lssad, Le decret legislatif algerien du 25 avril 1993 relatif a /'arbitrage international, 1993 REV. ARB. 377, 386; Art. 2 of the Brazilian law on Arbitration dated September 23, 1996, which refers to "rules oflaw" and "general principles of law, usage and customs and the rules of international commerce;" see Joao Bosco Lee, Le nouveau regime de /'arbitrage au Bresi/, 1997 REV. ARB. 199. On the meaning of Article 73 of the Tunisian Arbitration Code (Law No. 93-42 of April 26, 1993), and the divergence between the Arab language version and the translation into French, see Kalthoum Meziou and Ali Mezghani, Le Code tunisien de !'arbitrage, 1993 REV. ARB. 521, 533. On the situation in China, see Hong-Lin Yu, Some Thoughts on the Legal Status of A-national Principles in China, I INT'L ARB. L. REY. 185 (I 998). 99 On the more conservative position adopted when the arbitrators are to select the applicable law, see infra para. 1556. '00 See HOWARD HOLTZMANN AND JOSEPH E. NEUHAUS, A GUIDE To THE UNCITRAL MODEL LAW ON INTERNATIONAL COMMERCIAL ARBITRATION - LEGISLATIVE HISTORY AND COMMENTARY 768 (1989); RUDOLF MEYER, BONA FIDES UND LEX MERCATORJA IN DER EUROPAISCHEN RECHTSTRADITION (1994), and the review by Ignaz Seidl-Hohenveldern, 121 J.D.I. 1114 (1994), although the author is generally in favor of the existence ofa law common to the community of merchants. "'' On the issue, see, in particular, the observations made by A. Broches during the August 21, I990 working session of the International Law Association's Committee on International Commercial Arbitration, on the Committee's Report on "The Applicability of Transnational Rules in International Commercial Arbitration," INTERNATIONAL LAW ASSOCIATION, REPORT OF THE SIXTY-FOtJRTH CONFERENCE - BROADBEACH, (continued .. ).

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 804 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE Even in legal systems which, like that of England, have traditionally been extremely skeptical with respect to the application of transnational rules, it has been recognized, first by the courts102 and then in the 1996 Arbitration Act,103 that the parties can validly choose transnational rules as their applicable law.104 1445. - The acceptance of the validity of general principles of law as the law governing the contract is in keeping with international arbitral practice. The resolution adopted in 1979 in Athens by the Institute of International Law endorsed that approach in relation to state contracts, by providing that: [t]he parties may in particular choose as the proper law of the contract either one or several domestic legal systems or the principles common to such systems, or the general principles of law, or the principles applied in international economic relations, or international law, or a combination of these sources of law.105 The resolution adopted by the Institute in 1989 in Santiago de Compostela, again in connection with state contracts, was more general in scope, and provided that: these rules and principles [chosen by the parties] may be derived from different national legal systems as well as from non-national sources such as principles of international law, general principles oflaw and the usages of international commerce. wi ( ... continued) QUEENSLAND, AUSTRALIA 126, 147 (1991); Lando, supra note 19, at 154; Philippe Fouchard, La Loi-type de la C.N.U.D.C.J. sur /'arbitrage commercial international, 114 J.D.I. 86 I, 878 (1987). For a discussion of the position of the principal international conventions in this respect, see Horacio A Grigera Naon, Enforceability of Awards Based on Transnational Rules Under the New York, Panama, Geneva and Washington Conventions, in TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION, supra note 88, at 89. w, See, in particular, Deutsche Schachtbau, supra note 19; Pierre Lalive, Arbitrage en Suisse et "Lex mercatoria" (Note sur unimportant arret anglais), 1987 BULL. ASA 165; David W. Rivkin, Enforceability of Arbitral Awards Based on Lex Mercatoria, 9 ARB. INT'L 67, especially at 72 et seq. (1993). 101 After having established, in its Section 46(1)(a), the principle that the arbitrators shall decide the dispute "in accordance with the law chosen by the parties," the 1996 Arbitration Act states in its Section 46(1)(b) that "if the parties so agree," the arbitral tribunal shall decide the dispute "in accordance with such other considerations as are agreed by them or determined by the tribunal." This euphemism obviously covers any form of lex mercatoria. On the issue, see Stewart R. Shackleton, The Applicable Law in International Arbitration Under the New English Arbitration Act 1996, 13 ARB. INT'L 375 (1997); Claude Reymond, L'Arbitration Act 1996- Convergence et Originalite, 1997 REV. ARB. 45, 63. 11'4 For an early example of an award rendered in London on the basis of general principles of law, see the September 2, 1930 ad hoc Award, Lena Goldfields Ltd. v. USSR, discussed in V.V. Veeder, The Lena Goldfields Arbitration: the Historical Roots of Three Ideas, 47 IN'f'L & COMP. L.Q. 747 (1998). ws Art. 2, supra note 48..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 805 In even clearer terms, the International Law Association adopted a resolution following its conference held in Cairo in April 1992, which reads as follows: [t]he fact that an international arbitrator has based an award on transnational rules (general principles of law, principles common to several jurisdictions, international law, usages of trade, etc.) rather than on the law of a particular State should not in itself affect the validity or enforceability of the award; (I) where the parties have agreed that the arbitrator may apply transnational rules.106 1446. - Nevertheless, the terminology used remains vague in both contractual practice and academic commentary. Parties resort to a variety of expressions to convey their intention that the contract be governed by transnational rules, such as "general principles of international commercial law," "generally-recognized legal principles" and "principles common to several legal systems."w7 In state contracts, governing law clauses are complicated by references borrowed from public international law such as "international custom," "international law" and "general principles of law within the meaning of Article 38 of the Statute of the International Court of Justice."I08 Authors have endeavored to be more systematic by giving a precise definition to each of the expressions used, but the terminology still varies considerably from one author to the next.109 One has suggested that general principles in the public international law sense should be distinguished from general principles of international commercial law and that "general principles" should in any event be distinguished from "usages" and from "principles common to the parties' national laws."1wFor a generic description of rules other than those of a particular national law, some authors use the expression "a-national law"111 106 Report of the Sixty-Fifth Conference, Cairo 1992 and the commentary in TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION, supra note 88, at 36 and 65. On the case where the parties are silent, see infra para. 1556. 107 See, for example, the clauses cited by Rivkin, supra note I 02. 108 See, for example, the numerous clauses cited by Prosper Weil, Principes generaux du droit et contrats d'Etat, in LE DROIT DES RELATIONS ECONOMIQUES INTERNATIONALES - ETUDES OFFERTES A BERTHOLD GOLDMAN 387, especially at 389 et seq. (1982). For an example of the use of the words "international law" in a private law contract, see ICC Award No. 8365 (1996), Spanish bank v. German bank, 124 J.D.I. 1078 (1997), and observations by J.-J. Arnaldez. 1119 See, e.g., Michel Virally, Un tiers droit? Reflexions theoriques, in LE DROIT DES RELATIONS ECONOMIQUES INTERNATIONALES - ETUDES OFFERTES A BERTHOLD GOLDMAN 373 (1982); Weil, supra note 109, at 405 et seq.; CLIVE SCHMITTHOFF, INTERNATIONAL TRADE USAGES (ICC Publication No. 440/4, 1987); for a discussion of the distinctions put forward, see Bruno Oppetit, Arbitrage et contrats d'Etat-L 'arbitrage Framatome et autres cl Atomic Energy Organization of Iran, 111 J.D.I. 37 (1984). 110 Oppetit, supra note 110, at 45-46. 111 PHILIPPE FOUCHARD, L' ARBITRAGE COMMERCIAL INTERNATIONAL ifif 576 et seq. (1965)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 806 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE or "a-national rules,"112 while others refer to "international trade usages," 113 or to transnational rules.114 However, the term most frequently used in a generic sense, whether to promote the concept or to criticize it, is lex mercatoria.115 1447. - At the risk of adding to the confusion, and with little hope of being able to impose definitive meanings for each expression, we shall simply give the meaning attributed to each of those expressions as used hereafter. Indeed, the terminological debate is only important in so far as it facilitates discussion, on a substantive level, of the way in which the various concepts fit together. To denote rules other than those of a given jurisdiction, we shall use the generic expression lex mercatoria. The expression appears essentially in academic writing, and it covers not only transnational rules (which can only be described negatively as all rules which do not originate exclusively from a particular national legal system), but also international trade usages (meaning the practices usually followed in a particular trade). In general, we prefer the term "transnational rules" to "a-national rules," because such rules derive from the convergence of the main legal systems from which they are drawn. It is therefore counterintuitive to suggest that they have no link with national legal orders. Transnational rules in tum embrace two separate concepts: first, rules which are common to several legal systems, determined on the basis of the "tronc commun" method;116 and, 112 Eric Loquin, L"application de regles anationales dans L' APPORT DE LA JURISPRUDENCE ARBITRALE 67 (ICC Publication No. 440/1, 1986); DE BOISSESON, supra note 41, at 611. 113 E. Loquin, La realite des usages du commerce international, 1989 RID ECO. 163. 114 Lalive, supra note 49, at 31; the preliminary reports by Horacio A. Grigera Naon ("Civil Law Countries") and Paul Bowden ("Common Law Countries"), The Applicability of Transnational Rules in International Commercial Arbitration, in INTERNATIONAL LAW ASSOCIATION, REPORT OF THE SIXTY-FOURTH CONFERENCE, supra note 101, at 127 and 136. 115 See, for example, in addition to the authors cited supra note 88, Michael J. Mustill, The New Lex Mercatoria: The First Twenty-five Years, reprinted in LiBER AMICORUM FOR THE RT. HON. LORD WILBERFORCE 149 (M. Bos and I. Brownlie eds., 1987), reprinted in 4 ARB. INT'L 86 (1988); Paulsson, supra note 88; Andreas F. Lowenfeld, Lex Mercatoria: An Arbitrator's View, 6 ARB. INT'L 133 (1990); Christoph W.O. Stoecker, The Lex Mercatoria: To What Extent Does It Exist?, 7 J. INT'L ARB. 101 (Mar. 1990); Ole Lando, The Lex Mercatoria in International Commercial Arbitration, 34 INT'L & COMP. L.Q. 747 (1985); Keith Highet, The Enigma of the Lex Mercatoria, 63 TUL. L. REV. 613 (1989); Georges R. Delaume, The Proper Law of State Contracts and the Lex Mercatoria: A Reappraisal, 3 ICSID REV. - FOREIGN INV. L.J. 79 (1988); Georges R. Delaume, Comparative Analysis as a Basis of Law in State Contracts: the Myth of the Lex Mercatoria, 63 TUL. L. REv. 575 (1989); Philippe Kahn, Droit international economique, droit du developpement, lex mercatoria: concept unique ou plura/isme des ordres juridiques?, in LE DROIT DES RELATIONS ECONOMIQUES INTERNATIONALES- ETUDES OFFERTES A BERTHOLD GOLDMAN 97 (1982); Vanessa L.D. Wilkinson, The New Lex Mercatoria - Reality or Academic Fantasy?, 12 J. INT'L ARB. 103 (June 1995); JACK J. COE, JR., INTERNATIONAL COMMERCIAL ARBITRATION: AMERICAN PRINCIPLES AND PRACTICE IN A GLOBAL CONTEXT 80 et seq. (1997). "" On this method, see especially RUBINO-SAMMARTANO, supra note 3, at 274 et seq., who distinguishes it from that of "lex mercatoria;" see also Mauro Rubino-Sammartano, Le "tronc commun" des lois nationales en presence (Reflexions sur le droit applicable par l'arbitre international), 1987 REV. ARB. 133; Mauro Rubino- Sammartano, The Channel Tunnel and the Trone Commun Doctrine, 10 J. INT'L ARB. 59 (Sept. 1993). Comp. with Bertrand Ancel, The Trone Commun Doctrine: Logics and Experience in International Arbitration, (continued...).

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 807 second, general principles of international trade law, drawn from all the main legal systems and from international sources such as international arbitral case law and international conventions, which demonstrate widespread acceptance of the rule in question by the international legal community. The adoption of the UNIDROIT "Principles oflnternational Commercial Contracts" shows that attempts at unification can actually bear fruit. The authors of the UNIDROIT principles recognize that their principles can be chosen by parties to govern contracts and that they can be applied when the parties have agreed that their contract is governed by "general principles of law," "lex mercatoria" or similar concepts.117 It is also important to focus on the relationship between general principles of international commercial law and principles of public international law. In any situation, principles of public international law, themselves often drawn from comparative law, can provide a source of inspiration for principles of international commercial law because, like international conventions, they demonstrate the general acceptance of a set of rules. In the specific context of state contracts, the application of principles of public international law, modified where appropriate by the requirements of international commercial law, may well be more directly justifiable than in a purely private law context, particularly in defining the obligations of the state towards the private party. It is also essential, for reasons which we shall consider in detail later, not to confuse transnational rules with international trade usages. The latter are practices generally followed in a specific industry, as opposed to genuine rules of law.118 1448. - The parties' freedom to have their dispute governed by "rules of law" allows them to resort to any of the components of lex mercatoria described above. The arbitrators must therefore establish exactly what the parties had in mind when they used a particular expression to describe the rules oflaw applicable to the dispute. In so doing, they must take into account the continuing linguistic fluctuations and search for the true intention of the parties by going beyond the terms actually used. Thus, although we consider that the expression "trade usages" has a specific meaning and should not be confused with general principles of international trade law,119 that does not necessarily mean that parties do not actually intend to apply general principles when referring to "usages." As the arbitrators are required to give effect to the intentions of the parties, it would be perfectly legitimate for them to apply general principles in such cases.120 116 ( ...... continued) 7 J. INT'L ARB. 65 (Sept. 1990). 117 UNIDROIT, PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS (1994). See especially the preamble and the comment at 3--4. See also the references cited infra para. 1458, note I 74. 11• See infra para. 1513. 119 The expression "trade usages" is used in Article 17(2) (formerly 13(5)) of the ICC Rules) and in certain arbitration statutes. See irifra para. 1514. 1211 On this issue, see Gaillard, supra note 65, at 212 and n. 33..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 808 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE B. - CRITICAL ANALYSIS OF TRANSNATIONAL RULES 1449. - Ever since it appeared in the 1960s,121 the concept of lex mercatoria has been heavily criticized. In fact, if-as we believe they should-trade usages are defined restrictively as meaning only practices which are usually followed in a specific sector of business activity,122 the criticism concerns primarily transnational rules and, in particular, general principles of international commercial law drawn from international sources and from the analysis of comparative law. The criticism leveled at transnational rules is broadly of three kinds. 1° Conceptual Criticism 1450. -The first kind of criticism is conceptual. It involves the rejection of the idea that lex mercatoria can constitute a genuine legal order in the same way as national laws or public international Jaw. In this respect, the strongest criticism 123 is essentially based on the argument that the diverse rules grouped together under the heading lex mercatoria124 are not sufficiently organized to satisfy the criteria which traditionally define the existence of a legal order.125 Two arguments can be put forward against that view. First, general principles of law, which are the most significant constituent of lex mercatoria, are becoming increasingly specialized in arbitral practice. With specialization, they tend to form a coherent set of rules which, though incomplete, presents one of the characteristic features of a legal order: it contains general rules which lead to the creation of specific ones.126 121 On the analysis of early applications of lex mercatoria, see, for example, DE LY, supra note 88, ,r,r 8 et seq. 122 See infra para. 1514. 121 Paul Lagarde, Approche critique de la lex mercatoria, in LE DROIT DES RELATIONS ECONOMIQUES INTERNATIONALES -ETUDES OFFERTES A BERTHOLD GOLDMAN 125 (1982); see also ANTOINE KASSIS, THE:ORIE GENERALE DES USAGES DU COMMERCE ,r,r 584 et seq. (1984). 124 See infra paras. 1454 et seq. 125 On these criteria, see SANTI ROMANO, L'ORDREJURIDIQUE (1975). 1"' See on the example of estoppel, which, in this context, is derived from the more general principle of good faith, Emmanuel Gaillard, L'interdiction de se contredire au detriment d'autrui comme principe general du droit du commerce international (le principe de l'estoppel dans quelques sentences arbitrates recentes}, 1985 REV. ARB. 241; comp. with Philippe Pinsolle, Distinction entre le principe de l 'estoppel et le principe de bonne Joi dans le droit du commerce international, 125 JD.I. 905 (1998); more generally, on the numerous rules derived from the principle of good faith in the performance of contracts, see E. Gaillard, observations on the October 21, 1983 Award in ICSID Case No. ARB/81/2, Klockner Industrie-Anlagen GmbH v. United Republic of Cameroon, 114 JD.I. 137, 141 (1987); on the various rules derived from the obligation of the parties to cooperate in good faith, see Loquin, supra note 114, at 190. Significantly, there is now an increasing number of references to specialized branches of lex mercatoria. See, e.g., Charles Molineaux, Moving Toward a Construction Lex Mercatoria - A Lex Constructionis, 14 J INT'L ARB. 55 (Mar. 1997); Aboubocar Fall, Defence and Illustration of Lex Mercatoria in Maritime Arbitratioh - The Case Study of "Extra-Contractual (continued...).

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 809 Second, and more importantly, it is by no means evident that to be the object of a valid choice of governing law the rules chosen must necessarily be organized in a distinct legal order. Although the insistence by some advocates of lex mercatoria that it fulfils the criteria that traditionally define a legal order127 may have fueled the controversy on this point, it is the idea that the parties' choice of applicable law is necessarily restricted to a complete legal order which is questionable. 128 The justification based on that idea, whatever the order may be, is inoperative here. As long as the arbitrator can use a set of rules, whether complete or not, to avoid blindly giving effect to the terms of the contract,129 this criticism is misconceived. Furthermore, the control exercised by the courts in international commercial arbitration is largely based on the concept of international public policy, as applied when actions are brought to set aside or resist enforcement of an award. While we do not believe that arbitrators should automatically apply the provisions of a contract irrespective of its content,130 the fact remains that the subsequent review of the arbitrators' award by the courts to ensure its consistency with international public policy should dispel any fears arising from provisions which leave the arbitrators free to apply general principles of law rather than a national law. In any event, it is quite clear that by allowing the parties to refer to "rules of law" rather than to a "law," all of the statutes which have chosen to follow Article 1496 of the French New Code of Civil Procedure in this respect contradict the theory that, in order to be capable of being a valid choice of governing law, lex mercatoria must constitute a complete legal order. 2° Ideological Criticism 1451. - The second form of criticism leveled at lex mercatoria is ideological. Lex mercatoria is sometimes presented as only being to the benefit of the stronger parties to a contractual relationship and, in particular, to parties from developed nations in relations between developed and developing countries.131 One commentator has observed, without actually endorsing such criticism, that: 126 (...... continued) Detention" in Voyage Charter-party Disputes, 15 J. INT'L ARB. 83 (Mar. 1998); R. Doak Bishop, International Arbitration of Petroleum Disputes: the Development of Lex Petro/ea, XXIII Y.B. COM. ARB. 1131 (1998). 127 Criteria defined by ROMANO, supra note 126. For such an approach, see, for example, Loquin, supra note 113, especially Part II, "L 'existence d'un ordrejuridique a-national." 128 See BUCHER AND TSCHANZ, supra note 29, ,r 226. 129 See irifra paras. 1454 et seq. 110 See supra para. 1440. 111 See, for example, Wengler, supra note 54, at 501; AMORZAHI, L'ETAT ET L'ARBITRAGE 225 et seq. (1985)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 810 , THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE how often parties involved in international commerce and their counsels have ... called to be released from the 'shackles' of national laws, so as to submit themselves to more suitable rules, which they would impose on themselves 'spontaneously,' and how often, in return, their attempt has met with the suspicion that it conceals a 'law of the strong' imposed by powerful corporations on weaker ones, or even a take-over of the transnational legal 'space' by private economic powers.132 In other words, it has been suggested that "[e]ssentially, the lex mercatoria is a doctrine of laissez-faire."133 This criticism is connected in two respects to that of the idea that lex mercatoria is a legal order.134 First, lex mercatoria being an incomplete set of rules, any contract selecting it as the applicable Jaw will only partially be governed by rules of law. According to this view, lex mercatoria thus leads to the recognition of a contract which has, to some extent, no governing Jaw ("contrat sans lot'). Second, the content of lex mercatoria prompts some authors to conclude that it is merely another way of affirming the primacy of the contract over the law. If one considers the principle pacta sunt servanda to be the most fundamental-if not the only-principle of lex mercatoria, having the contract governed by lex mercatoria could result in the terms of the contract prevailing over any other rule. That, once again, would lead to a contract with no governing law. 1452. - Such criticism is not altogether unfounded. It is true that some awards give the impression that the only achievement, if not the only aim, of the substantial efforts that some authors devote to the subject of lex mercatoria has been the justification of the principle of the binding character of contracts. The principle of good faith in the performance of contracts135 is often included, as is the principle of the protection of vested rights.136 However, those additions scarcely add anything to the principle pacta sunt servanda if"bad faith" is simply defined, as is the case in some arbitral awards, as the failure to comply with the contract, and "vested rights" as those rights which result from a straightforward application of the contract. 137 1453. - However, although this misguided application of the lex mercatoria doctrine is sometimes found, it does not necessarily follow from the general principles of law method. Nothing in the elaboration of transnational rules restricts the method to the principle of the binding authority of contracts. It is equally evident, from comparing national laws and m Lagarde, supra note 124, at 125-26. m Mustill, supra note 116, at 18 I. iJ• See supra para. 1450. iJs See the awards cited infra para. 1460. 1)6 See the awards cited infra para. 1461. IJ7 On this issue, see infra para. 1461..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 811 international sources, that only validly concluded contracts are binding on the parties and that there are a number of exceptions to the principle of the binding character of contracts.138 This allows a perfectly clear distinction to be drawn between the doctrine of transnational rules and that of contracts with no governing law. In addition, it is by no means clear that a strict application of the pacta sunt servanda principle is necessarily unfavorable to the weaker party, and in particular to developing countries and their nationals, who are nowadays more often claimants in arbitral proceedings than they were in the past. Neither is it clear that arbitral awards based on general principles are systematically unfavorable to the weaker party. For example, in the Klockner case, the 1983 ICSID award found in favor of the Republic of Cameroon on the basis of the principle of "the duty of full disclosure to a partner."139 In 1985, amidst much criticism, an ad hoc Committee annulled that award on the grounds that in that case it was not legitimate to apply exclusively general principles of law.140 Principles such as the sovereignty of states over their natural resources, the protection of humanity's cultural heritage141 and the interpretation of a contract against the party that drafted it,142 all of which tend to protect the State or the weaker party, equally form part of the general principles of international commercial law. Transnational rules therefore cannot be suspected of being inherently unfavorable to developing countries.143 3° Practical Criticism 1454. - The third kind of criticism raised against the use of transnational rules and, more specifically, general principles of law concerns the difficulty of determining their exact content. This criticism is particularly prevalent in common law countries. There has been much cynicism as to the vague nature of general principles, described in ironic terms as being so difficult to define that they appear to boil down to what the arbitrators decide in each particular case. That has prompted some commentators to ask whether lex mercatoria offers "a set of rules which is sufficiently accessible and certain to permit the efficient conduct of ... transactions."144 Compared to a given national law, lex mercatoria is ''" See infra paras. 1464 et seq. "' October 21, 1983 Award by E. Jimenez de Arechaga, president, W.D. Rogers and D. Schmidt, arbitrators (D. Schmidt dissenting), in ICSID Case No. ARB/81/2, Klockner Industrie-Anlagen GmbH v. United Republic of Cameroon, 111 J.D.I. 409,426 (1984), and observations by E Gaillard, 114 JD.I. 137 (1987); for an English translation, see I J. INT'L ARB. 145 (1984); X Y.B. COM. ARB. 71 (1985); 2 ICSID REP. 9 (1994). 140 Decision of May 3, 1985, by P. Lalive, president, A. EI-Kosheri and I. Seidl-Hohenveldern, arbitrators, 114 J.D.I. 163 (1987), and observations by E. Gaillard at 185; for an English translation, see 1 ICSID REV. - FOREIGN INV. L.J. 89 (I 986); XI Y.B. COM. ARB. 162 (1986); 2 ICSID REP. 95 (I 994). 141 See infra para. 1468. 142 See infra para. 1475. 143 See Philippe Leboulanger, L'arbitrage international Nord-Sud, in ETUDES OFFERTES A PIERRE BELLET 323, especially at 338 el seq. (1991). 144 Mustill, supra note 116, at 180..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 812 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE described as being vague and incomplete. Contradictions sometimes arise from the grey areas surrounding certain rules, and critics point out, for example, that the principle pacta sunt servanda and the doctrine of change in circumstances ("imprevision")-which is presented for the purposes of their reasoning as the negation of the principle pacta sunt servanda-are both included among the rules of lex mercatoria. 145 It has also been suggested that in quantitative terms the results of twenty-five years of applying lex mercatoria are somewhat disappointing.146 We consider that although these observations do contain an element of truth, this owes more to the nature of arbitration than to the use of general principles. As arbitral tribunals are neither permanent nor organized in a hierarchy aimed at providing a uniform interpretation of the law by a supreme court, the case law they generate cannot aspire to the same degree of consistency as that of the courts of a particular jurisdiction. If, from the point of view of the predictability of the applicable rules, the ideal is national law as applied by the relevant supreme court, there is no doubt that arbitral tribunals offer a lesser degree of predictability. However, in the context of international commerce, the real question is whether arbitrators ruling on the basis of general principles of international commercial law are significantly less predictable than arbitrators ruling on the basis of a national law, or even than a national court applying a law other than its own national law. Given the nature of international arbitration, the striking feature of arbitral case law is in fact the remarkable consistency of the decisions reached in spite of the diversity of the reasoning employed. 147 Further, and although its importance should not be exaggerated, the flexibility gained by the arbitrators in being able to apply general principles of law is perfectly legitimate, provided that the parties clearly intended that they should do so.148 The argument that some of the principles of lex mercatoria are contradictory also fails to take into account the way the rules of lex mercatoria tend to be organized. Assuming that the doctrine of imprevision is a transnational rule, which is sometimes recognized in arbitral case law,149 there is no incompatibility with the principle pacta sunt servanda. It is simply an exception to that principle, and an exception which only comes into play where a number of conditions are satisfied. In legal systems where the doctrine applies, there is no contradiction between the provisions implementing the doctrine of imprevision and those implementing the principle pacta sunt servanda. On the contrary, those provisions are 145 See, e.g., KASSIS, supra note 124, at 349 et seq. But see, on the reality of arbitral case law, infra para. 1458 and on this issue, generally, supra paras. 371 et seq. 146 Mustill, supra note 116, at 180; comp. with Georges R. Delaume, The Proper Law of State Contracts and the Lex Mercatoria: A Reappraisal, 3 ICSID REV. -FOREIGN INV. L.J. 79 (1988); Stoecker, supra note 116, at 125; Emmanuel Gaillard, Centre International pour le Reglement des Differends Relatifs aux lnvestissements C.l.R.D.l.) - Chronique des sentences arbitrales, 113 J.D.l. 197, 199 (1986). 147 See irifra paras. 1459 et seq. On the relative predictability of transnational rules, see Emmanuel Gaillard, Use of General Principles of International Law in International Long-Term Contracts, 27 INT'L Bus. LAW. 214 (1999). 1" For the situation where the parties are silent as to the applicable law, see infra paras. 1554 et seq. 149 See infra para. 1482..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 813 linked, often in a single article, by the logic of principle and exception.150 Lex mercatoria, which is becoming increasingly structured,151 is perfectly capable ofresolving such supposed contradictions although, in the absence of a supranational court responsible for maintaining uniformity in arbitral case law, differences of interpretation may continue to arise. Finally, we need to address the argument based on what is perceived as inadequacy of lex mercatoria in quantitative terms. It will only be impossible to find within lex mercatoria "a set of rules which is sufficiently accessible and certain to permit the efficient conduct of ... transactions"152 if one's objective is to draw up a list of general principles which already appear in arbitral case law. However, to seek to draw up such a list is to misunderstand the aims of the lex mercatoria doctrine: the application of general principles is essentially a method-as opposed to a list-enabling almost any number of principles to be identified and applied to each disputed situation. We shall now examine that method, and the results it produces. C. - METHOD AND CONTENT OF TRANSNATIONAL RULES 1455. - When faced with a clause which, in one form or another, 153 provides that a dispute is to be governed by transnational rules, the arbitrators, the parties and their counsels will have to determine, once the dispute has arisen, the actual content of the rules applicable to the dispute. This is the true test of the effectiveness of lex mercatoria as an instrument for resolving disputes in international trade. Again, it cannot be too strongly emphasized that applying transnational rules involves understanding and implementing a method, rather than drawing up a list of the general principles of international commercial Iaw.154 Therefore, after first discussing the transnational rules method, we shall examine a few examples of rules generally considered as being general principles of international commercial law. 1° Method 1456. - Two issues should be borne in mind with respect to the method to be used when identifying and applying general principles. 150 A good illustration of this structure can be seen in the 1994 UNIOROIT Principles of International Commercial Contracts, supra note 118, Arts. 6.2.1 et seq., at 145 et seq. 151 See supra para. 1450. 152 See Mustill, supra note 116, at 180. 1" See supra para. 1446. 154 On this issue, generally, see TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION, supra note 88; Gaillard, supra note 88, IO ICSID REV. - FOREIGN INV. L. J. 224-28 (1995); 122 J.D.I 22-26 (1995); but see BERGER, supra note 88, at 218 et seq..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 814 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE 1457. -The first is that the starting point for any analysis of the method for determining applicable rules of law must be the choice of law clause itself. In using the generic term lex mercatoria to cover all of the different situations where the parties do not simply choose a particular national law, it is important not to lose sight of the diversity of the concepts liable to be included under that heading.155 Amid the controversy over the legal nature of lex mercatoria and the various criticisms it has attracted, 156 it is equally important to take full account of the diversity of the contractual provisions submitting certain disputes to rules other than those of a particular legal system. The task of the arbitrators-and hence that of the parties when presenting their case-is invariably to give effect to the choice initially made by the parties. The parties and the arbitrators should therefore begin by examining the choice of law clause for guidance as to the method to be used to determine the relevant rules for resolving the dispute. Some clauses provide that principles common to several specified legal systems are to apply. In such a case, the arbitrators must use the "tronc common" method157 and conduct a comparative analysis limited to that of the listed legal systems, unless the clause itself allows other rules to be used on a subsidiary basis. Thus, for example, the construction contract for the Channel Tunnel stated that it was governed by common principles of English and French law, and in the absence of such common principles by such principles of international trade law as have been applied by national and international tribunals.158 On several occasions, the panel of experts appointed under Article 67 of that same contract was required to draw up such common or general principles, and succeeded in doing so.159 It is fairly frequent for the application of a national law to be combined with that of principles of international origin. Thus, for example, an Iranian petroleum agreement signed in 1954 was governed by 1" See supra para. 1447. 156 See supra paras. 1450 et seq. 157 See, for example, ICC Case No. 5 I 63 where the arbitrators had to apply "the principles common to the laws of the Arab Republic of Egypt and the United States of America" (unpublished clause cited in Gaillard, supra note 88, IO ICSID REV. -FOREIGN INV. L.J. 225 (1995); 122 J.D.l. 23 (1995)). On the terminology, see supra para. 1447. "" Clause 68 of the contractual conditions attached to the construction contract signed on August I 3, 1986 by Eurotunnel and Transmanche Link (ed. ofJan. 27, 1987). 159 On this panel, see supra para. 28..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 815 principles of law common to Iran and to the various countries to which the other parties belong and, failing that, by principles of law generally recognized by civilized nations, including such principles applied by international tribunals.160 Similarly, the Libyan nationalization arbitrations were governed by principles of law of Libya common to the principles of international law and, in the absence of such common principles then by and in accordance with the general principles of law as may have been applied by international tribunals.161 More recently, the arbitrators who made the ad hoc award in the Banque Arabe et Internationale d'Jnvestissements case on November 17, 1994 in Amman were required to apply to a contract, in the absence of provisions to the contrary, "common legal principles prevailing in the member countries of the Corporation, and the recognized principles of International Law."162 Other clauses refer exclusively to rules of international origin, with or without indicating how those rules should be determined. Such clauses are less common than combinations of rules from different legal systems, and they tend to be formulated in a variety ofways.163 In all cases, any indications given by parties as to the method of determining the applicable rules must take precedence. Such indications would include a specified hierarchy between the various given sources or instructions to apply only principles common to certain regions of the world.164 16" Article 46 of the Tehran petroleum agreements of October 1954, 1956 REV. ARB. 63, 69. See also the unpublished arbitration clause in ICC Case No. 5331, cited in Gaillard, supra note 88, 10 ICSID REV. - FOREIGN INV. L.J. 225, n. 71; 122 J.D.I. 23, n. 71 (1995). 161 See Apr. 12, 1977 ad hoc Award by S. Mahmassani, Libyan American Oil Co. (LIAMCO) v. Government of the Libyan Arab Republic, 20 I.L.M. I, 33 (1981); VI Y.B. COM. ARB. 89 (1981); for a French translation, see I 980 REV. ARB. 132. See also Robert B. von Mehren and P. Nicholas Kourides, International Arbitrations Between States and Foreign Private Parties: The Libyan Nationalization Cases, 75 AM. J. INT'L L. 476 (1981). On the validity of these provisions, see, for example, Derains, supra note 28, at 390. 162 Award by 0. Nabulsi, chairman, Z. Hashem and A. El Kosheri, arbitrators, supra note 68. l6J For example, "generally recognized principles of international commercial law," ICC Case No. 5333, unpublished. See also Article 3.4 of the Multilateral Investment Guarantee Agency General Conditions of Guarantee for Equity Investments, dated January 25, 1989, 4 ICSID REV. - FOREIGN INV. L.J. 112, 114, which refers to the contract, the convention establishing MIGA, and general principles of law. On this issue, see Jean Touscoz, Le reglement des differends dans la Convention instituant /'Agence Multilaterale de Garantie des lnvestissements (A.MG.I.): un developpement de /'arbitrage international et du droit des investissements internationaux, 1988 REV. ARB. 629, 636; Ibrahim F.I. Shihata, Towards a Greater Depoliticization of Investment Disputes: The Roles of JCSID and MIGA, I ICSID REV. - FOREIGN INV. L.J. I (1986). 164 For example, "principles of law applicable in Western Europe," ICC Case No. 6378 (1991), 120 J.D.l. I 018 (1993), and observations by D. Hascher; principles oflaw applicable "in Northern Europe," unpublished clause. On regional transnational rules, sec Gaillard, supra note 88, 10 ICSID REV. - FOREIGN INV. L.J. 230-31 (1995); 122 J.D.l. 28-30 (1995)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 816 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE 1458. -The second point to bear in mind is that where the parties submit their disputes to general principles of international commercial law, or behave in a manner which can reasonably be interpreted as conveying the same intention,165 the arbitrators should determine the applicable rules by examining comparative law, international instruments and international case law.166 Comparative law is a fundamental source of transnational rules. Arbitrators often identify general principles by drawing them from various legal systems in which they are recognized, sometimes in different forms.167 However, in order to be considered as a general principle, a rule need not be found in every legal system. That would amount to giving a veto to systems which take an isolated position, whereas the goal is precisely to find a generally accepted tendency rather than to select, often somewhat randomly, a particular legal system to govern disputes. 168 International instruments and, in particular, international conventions are also a common source of inspiration for arbitrators seeking to determine the rules of lex mercatoria. This is entirely justified, in so far as these texts reflect the agreement of a number of countries on a particular issue. Thus, for example, arbitrators deciding a dispute concerning international sales of goods on the basis of general principles are likely to refer to the Vienna Convention of April 11, 1980, on Contracts for the International Sale of Goods. 169 Likewise, the '"' See supra para. 1448. ""' On the sources of lex mercatoria, see especially Lando, supra note 19, at 144 et seq. 167 See, for example, on estoppel by representation, known in German and Swiss law as the principle of non concedit venire contrafactum proprium, infra para 1462. '"' See, with regard to the arbitration agreement, the example of the principle of separability set forth supra para. 405, note 43. On this issue, generally, see Gaillard, supra note 88, 10 ICSID REV. - FOREIGN INV. L.J. 228-30 (1995); 122 J.D.l. 26-28 (1995). '"' On the application by arbitrators of the 1964 Hague Convention on the International Sale of Goods, which was the predecessor of the 1980 Vienna Convention, see ICC Award No. 2879 (I 978), French buyer v. Yugoslavian seller, 106 J.D.I. 989 (1979), and observations by Y. Derains. But see, on the refusal to apply the 1980 Vienna Convention on the grounds that the Convention was not in force on the date the contract was signed, ICC Award No. 6281 (1989), Egyptian buyer v. Yugoslavian seller, I I 6 J.D.I. I I 14 (1989), and observations by G. Aguilar Alvarez; 118 J.D.I. 1054 (1991), and D. Hascher's note; for an English translation, see XV Y.B. COM. ARB. 96 (1990). On the use of the Vienna Convention as a means of determining international trade usages, see ICC Award No. 5713 (Paris, 1989), Sellerv. Buyer, XV Y.B. COM. ARB. 70 (1990); ICC Award No. 7331 (1994), Yugoslavian sellerv. Italian buyer, 122 J.D.I. 1001 (1995), and observations by D. Hascher; ICC BULLETIN, Vol. 6, No. 2, at 73 (1995). On the use of the Vienna Convention to support the position ofa national law, see ICC Award No. 6281 (1989), supra, 118 J.D.I. 1056 (1991); on the finding that the 1964 Convention had been incorporated into German law, see ICC Award No. 6309 (1991), German company v. Dutch company, 118 J.D.I. 1046 (1991), and observations by J.-J. Arnaldez; and, on the application of the Vienna Convention as the applicable law, ICC Award No. 7153 (I 992), Austrian party v. Yugoslavian party, 119 J.D.I. 1006 (1992), and D. Hascher's note; ICC Award No. 8324 (1995), Seller v. Buyer, 123 J.D.I. 1019 (1996), and D. Hascher's note; ICC Award No. 8128 (1995), Buyer v. Seller, 123 J.D.I. 1024 (1996), and D. Hascher's note. On this issue, generally, see Jean-Paul Beraudo, The United Nations Convention on Contracts for the International Sale of Goods and Arbitration, ICC BULLETIN, Vol. 5, No. I, at 60 (1994); Andrea Giardina, International Conventions on Conflict of laws and Substantive law, in ICCA CONGRESS SERIES NO. 7, PLANNING EFFICIENT ARBITRATION PROCEEDINGSfTHE LAW APPLICABLE IN INTERNATIONAL ARBITRATION 459 (A.J. van den Berg ed., 1996). On the use of international treaties to establish transnational (continued...).

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 817 resolutions of sufficiently representative international organizations can certainly lead to the creation of new general principles. For example, it is not surprising that, on the basis of the measures taken by the United Nations and the European Communities during the Gulf crisis, an arbitral tribunal identified and applied principles which effectively justify the non- performance of certain contracts signed with Iraqi parties.170 In the same way, the work of an organization such as UNIDROIT is particulary influential in determining general principles of law.171 In May 1994, UNIDROIT published a set of Principles of International Commercial Contracts. These principles are intended to apply particularly "where the parties have agreed that their contract be governed by 'general principles of law,' the 'lex mercatoria' or the like."172 The Principles consist of 108 rules presented in the form of a restatement and accompanied by a commentary. It is a remarkable work of comparative law, which has undoubtedly made a vital contribution to the development of transnational rules.173 Arbitrators also often refer to international case law in determining the content of transnational rules. This is naturally true of arbitral awards, which are now accessible as a result of their publication in various periodicals. It is in the area of general principles of law that it is most clear that the previously contentious issue of whether "arbitral case law" actually exists has been overtaken by arbitral practice. In arbitral practice, of course, arbitrators very often use precedents established by other arbitral awards rendered in similar 169 ( continued) choice oflaw rules, see infra para. 1549. 170 See the July 20, 1992 Award rendered under the auspices of the Chamber of National and International Arbitration of Milan, Subcontractor v. Contractor, 1993 INT'L CONSTR. L. REV. 201; XVIII Y.B. COM. ARB. 80 (1993). For a compilation of the legislation passed following the Gulf conflict, sec, for example, THE IMPACT OF THE FREEZE OF KUWAITI AND IRAQI ASSETS ON FINANCIAL INSTITUTIONS AND FINANCIAL TRANSACTIONS (B.R. Campbell & D. Newcomb eds., 1990); THE KUWAIT CRISIS: SANCTIONS AND THEIR ECONOMIC CONSEQUENCES (D.L. Bethlehem ed., 1991) (2 vols.); more generally, see Yves Derains, l 'impact des crises politiques internationa/es sur /es contrats internationaux et I'arbitrage commercial international/The Impact of International Political Crises on International Contracts and International Commercial Arbitration, 1992 INT'L Bus. L.J. 151; Lambert Matray, Embargo and Prohibition of Performance, in ACTS OF STATE AND ARBITRATION 69 (K.-H. Bockstiegel ed., 1997). 171 See, e.g., Michael Joachim Bonett, The UNIDROIT Initiative for the Progressive Codification of International Trade law, 27 INT'L& COMP. L.Q. 413 (1978). 172 Supra note 118, at I. For an example of an award solely based on UNIDROIT Principles pursuant to the intention of the parties, see ICC Award No. 8331 (1996), Vehicle supplier v. Purchaser, 125 J.D.I. 1041 (1998), and observations by Y. Derains. 171 On this issue, generally, see UNIDROIT PRINCIPLES FOR INTERNATIONAL COMMERCIAL CONTRACTS: A NEW LEX MERCATORIA? (ICC Publication No. 490/1, 1995); Klaus Peter Berger, The lex Mercatoria Doctrine and the UNIDROIT Principles of International Commercial Contracts, 28 LAW & POL'Y INT'L Bus. 943 (1997); BERGER, supra note 88; Andrea Giardina, Les Principes UNIDROITsur les contrats internalionaux, 122 J.D.I. 547 (1995); Jean-Paul Beraudo, Les principes d'Unidroit relatifs au droit du commerce international, JCP, Ed. G, Pt. I, No. 3842 (1995); MICHAEL 1. BONELL, AN INTERNATIONAL RESTATEMENT OF CONTRACT LAW- THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS ( I994); Michael Joachim Bonell, The UNIDROIT Principles of International Commercial Contracts: Towards a New lex Mercatoria?/Les principes UNIDROIT relatifs aux contrats du commerce international: vers une nouvelle lex Mercatoria?, 1997 INT'L Bus. L.J. 145; Michael Joachim Bonell, The UNIDROIT Principles in Practice: The Experience of the First Two Years, 1997 UNIFORM L. REV. 34; Hans van Houtte, The UNIDROIT Principles of International Commercial Contracts, 11 ARB. INT'L 373 (1995)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 818 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE circumstances.174 The case law generated by permanent international courts, such as the International Court of Justice, will also be relevant, both when the parties expressly provide that it should apply175 and when, more generally, it reflects widely accepted rules of Iaw.176 2° Content 1459. -As the theory of general principles of international commercial law essentially resides in a method of determining such principles,177 to present them in the form of a list will inevitably be too simplistic an approach. As a result, the debate among certain authors as to whether a list of some twenty principles is long or short is irrelevant. A list of principles often quoted by commentators discussing lex mercatoria is that compiled in an article that seeks to demonstrate the inadequacy of the method.178 The author of that article listed twenty principles of varying importance which had been considered in arbitral awards as constituting general principles. His goal was to illustrate the dearth of such principles. Ironically, his list has subsequently been used to support lex mercatoria.179 Another author presented and discussed a number of principles more convincingly in an article on "the reality of international trade usages." He lists the principles under the following headings: (I) the predictability of transactions (including the "presumption of competence of parties in international trade," "the effectiveness of the arbitration agreement," "the principle of non-reliance on the lack of power of a contractual negotiator" and "the prohibition on contradicting oneself to the detriment of another;" (2) the adaptability of contracts (including "the presumption of acquiescence in an act of performance other than that which was defined in the contract" and "the obligation to re- negotiate"); (3) the cooperation of the parties (including "the obligation to mitigate damages," "equal distribution of the burden of risks" and "the obligation to be candid"); 174 On this issue, generally, and on the affirmative response to the question of whether arbitral case law actually exists, see supra paras. 371 et seq. 175 See the examples cited supra para. 1446. 176 On the use of the case law of the International Court of Justice as a basis for the principle of estoppel by representation in international trade law, see, for example, the September 25, 1983 Jurisdictional Decision by B. Goldman, president, I. Foighel and E.W. Rubin, arbitrators, in ICSID Case No. ARB/81/1, Amco Asia Corp. v. Republic oflndonesia, 23 l.L.M. 351,381 (1984); X Y.B. COM. ARB. 61 (1985); I ICSID REP. 389 (1993); for a French translation, see 1985 R.Ev. ARB. 259; 113 J.D.I. 200,220 (1986), and observations by E. Gaillard. 177 See supra paras. 1455 et seq. 178 See Mustill, supra note 116. 179 See, e.g., Philippe Kahn, Les principes generaux du droit devant !es arbitres du commerce international, 116 J.D.I. 305, 325 (I 989); Andreas F. Lowenfeld, Lex Mercatoria: An Arbitrator's View, in LEX MERCATORJA AND ARBITRATION 71 (T.E. Carbonneau ed., rev. ed. 1998), who responds to Mustill's criticism that the Ten Commandments or the U.S. Bill of Rights might also be consMered "modest," at 89. See also Goldman, Nouvelles reflexions sur la Lex Mercatoria, supra note 88..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 819 (4) ethical business practices (which essentially means "the unenforceability of contracts involving corruption").180 However valuable they may be, these lists are by no means exhaustive. The same is true of the list of principles drawn up by UNIDROIT181 and the examples discussed below. 1460. - Illustrations of general principles of international commercial law found in arbitral case law naturally include rules with an extremely broad scope. This is the case of both the principle of the binding force of contracts, often expressed in arbitral awards as pacta sunt servanda, and the principle of good faith. There are now countless arbitral awards recognizing that both rules182 are general principles of international commercial law. ln most cases, arbitrators simultaneously characterize the two rules as general principles.183 1461. - In fact, some awards treat the principle of good faith as simply another expression of the principle pacta sunt servanda. That will be the case if bad faith is defined as the failure to honor one's contractual commitments. That is a position that contributes little to the development of lex mercatoria.184 Likewise, a general principle that contracts are binding is hardly revolutionary given that the same principle appears in all legal systems. Besides, awards which restrict themselves to applying that principle are most exposed to the criticism that lex mercatoria is merely a device enabling the hierarchy of norms to be altered "" See Loquin, supra note 114, at 168 et seq. "' See supra para. 1458. 182 For awards which recognize the rule pacta sun/ servanda as a general principle, sec, for example, ICC Award No. 3540 (1980), French contractor v. Yugoslavian sub-contractor, I 08 J.D.I. 914, 917 (1981), and observations by Y. Derains; for an English translation, see VII Y.B. COM. ARB. 124 (1982); ICC Award No. 2321 (1974), Two Israeli companies v. Government of an African state, I Y.B. COM. ARB. 133 (1976); for a French translation, see 102 J.D.I. 938 (1975), and observations by Yves Derains; the November 20, 1984 Award in ICSID Case No. ARB/81/1, Amco Asia Corp. v. Republic of Indonesia, which was later annulled on different grounds, 24 I.L.M. I 022, I034-35 (I 985); I INT'LARB. REP. 601 (1986); I ICSID REP. 413 (1993); for a French translation, see 114 J.D.I. 145, 154 (1987), and observations by E. Gaillard. For awards recognizing the principle of good faith to be a general principle, see, for example, the October 26, 1979 Award by Messrs. Cremades, chairman, Ghestin and Steiner, arbitrators, in ICC Case No. 3131, Pabalk Ticaret Limited Sirketi v. Norsolor, 1983 REV. ARB. 525, 531. On this issue, generally, see Pierre Mayer, Le principe de bonne Joi devant /es arbitres du commerce international, in ETUDES DE DROIT INTERNATIONAL EN L'HONNEUR DE PIERRE LALIVE 543 (1993). '" See, for example, the April 12, 1977 LIAMCO Award, supra note 162, 20 I.L.M. 54-58; 1980 REV. ARB. 158-162; VI Y.B. COM. ARB. 89 (1981); for a French translation, see 1980 REV. ARB. 132, especially at 158-62; see also the commentaries by Patrick Rambaud, Un arbitrage petrolier: la sentence LIAMCO, 26 AFDI 274 (1980), and by Brigitte Stern, Trois arbitrages, un meme probleme, trois solutions - Les nationalisations petrolieres libyennes devant I'arbitrage international, 1980 REv. ARB. 3; the January 19, 1977 Award by R.-J. Dupuy in Texaco, supra note 56; ICC Award No. 5953 (1989), supra note 64. ,., But see, on the potential implications of the notion of good faith, GERARD CORNU, REGARDS SUR LE TITRE Ill DU LIVRE III DU CODE CIVIL. DES CONTRATS ET DES OBLIGATIONS CONVENTIONNELLES EN GENERAL, LES COURS DEDROIT, 1976-77, at 200..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 820 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE by putting the contract before the law.185 The same applies to the principle of the protection of vested rights, found in certain arbitral awards.186 1462. - However, the principle of good faith is particularly useful when understood as providing the basis for more specific rules, which may in tum become general principles. This is the case, for example, of the principle that a party cannot contradict itself to the detriment of another. This principle is known in German and Swiss law by the maxim non concedit venire contra factum proprium and, in common law countries, as estoppel by representation. It is found in French law in the form of a principle of consistency 187 and has also been recognized in arbitral case law.188 It enables arbitrators to take concrete measures where the conditions for the application of the principle are satisfied, which occurs far less frequently than parties suggest.189 Even the most reticent observers of a phenomenon which they perceive as a means allowing arbitrators to create new rules of law recognize that the principle of good faith potentially constitutes one of the richest sources of lex mercatoria.190 1463. - In any case, the principle pacta sun/ servanda is subject to certain limits in all legal systems. It only applies if the contract is validly entered into, and exceptions to the 1•1 See supra paras. 1451 et seq. '"" See, e.g., the August 23, 1958 Award in the ARAMCO case, supra note 47; the 1984 Award of the lran-U.S. Claims Tribunal in Starrett Hous. Corp. v. Iran (Case No. 24), Interlocutory Award No. ITL 32-24-1, 4 lran-U.S. Cl. Trib. Rep. 122; the November 20, 1984 Award in Amco, supra note 183, 24 I.L.M. 1035 (1985); I 14 J.D.I. 154 (1987). 187 See, e.g., CA Paris, Feb. 13, 1990, Sunkyong Ltd. v. Interagra lpitrade International, Dalloz, Jur. 593 (1990), and G. Peyrard's note. See also Philippe Blonde!, Les "principes generaux" dans la jurisprudence de cassation - Rapport de synthese, JCP, Ed. E., Suppl. 5-1989, at 16 (1989), especially at 20; Horatia Muir Watt, Pour l'accueil de l'estoppel en droit prive franr;ais, in L'INTERNATIONALISATION DU DROIT - MELANGES EN L'HONNEURDE YVON LOUSSOUARN 303 (1994). 1•• See, for example, the September 25, 1983 Jurisdictional Decision in Amco, supra note 177, 23 I.L.M. 377-82 (1984); 113JD.I.218-21 (1986), and observations by E. Gaillard at 250-52; the September 2, 1983 Award of the Iran-U.S. Claims Tribunal in Woodward-Clyde Consultants v. Iran, Award No. 73-67-3, 3 Iran-U.S. Cl. Trib. Rep. 239 (1983); for a French translation, see 1985 REV. ARB. 272; the June 5, 1990 Award in ICSID Case No. ARB/81/1, Amco Asia Corp. v. Republic oflndonesia, 5 INT'L ARB. REP. D4, D37 (Nov. 1990); XVII Y.B. COM. ARB. 73 (1992); I ICSID REP. 569 (1993); for a French translation, see 118 J.D.I. 172, I 77 (1991), and observations by E. Gaillard, at 183-84; see also the preliminary award in ICC Case No. 1512 (Jan. 14, 1970), Indian cement company v. Pakistani bank, 1992 BULL. ASA 505; V Y.B. COM. ARB. 174 (1980); ICC Award No. 5926 (I 989), unpublished, in which the parties, from Latin America and North America respectively, both recognized the existence of the principle but each sought to invoke it to support its case. See, for the same situation, ICC Award No. 6363 (1991), Licensor v. Licensee, XVII Y.B. COM. ARB. I 86 (1992), especially 144 at 201. See also the April 8, 1999 ad hoc Award made in Paris, Construction companies v. Middle East State, unpublished, which decides that a party which has assigned a contract without the prior consent of its co- contractor cannot rely on this circumstance in the context of the determination of the parties to the arbitration agreement (at 75). '"" On this issue, generally, see Gaillard, supra note 127; Loquin, supra note 114, at 173; SCHMITTHOFF, supra note 110, 1 70; Kahn, supra note 180, at 323; Pinsolle, supra note 127; Paul Bowden, l 'interdiction de se contredire au detriment d'autrui (estoppe/) as a Substantive Transnational Rule in International Commercial Arbitration, in TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION, supra note 88, at 125. "0 Mayer, supra note 183..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 821 principle may be justified by the need to protect the weaker party or the general interest. The solemn formulation of principles such as pacta sunt servanda and the principle of good faith does not mean that similar prerequisites and exceptions do not exist when the transnational rules method applies.191 Arbitral case law shows that general principles are not confined to a few rules so broad in scope that they add nothing to the provisions of the contract, but that, on the contrary, they cover in some detail most of the major issues of international contract law. This can be seen with respect to the validity of contracts, as well as to their interpretation and performance. a) Principles Relating to the Validity of Contracts 1464. - The issues of a contracting party's capacity and power have given rise to a number of general principles. It has been suggested that there is a principle according to which "a party cannot rely on the absence of power of the person negotiating a contract." This would prevent "one of the parties to a contract from relying on the fact that its own representative did not have the requisite powers, provided that the other party was unaware of that fact."192 Expressed in this way, this principle goes too far, as the fact that the other party is required to be reasonably diligent should also be taken into account.193 As one author has observed, there is "a tendency among arbitrators in international commerce to consider that the law should only protect parties to the extent that are not under a duty to protect themselves."194 The real principle in this context is therefore that a reasonably diligent party can rely on its legitimate ignorance of the fact that the person who signed the contract was not empowered to do so.195 1465. -Arbitral case law has also given rise to principles concerning invalid consent given by parties to a contract. In particular, it has established a principle that "in international trade parties are presumed to be competent." This principle makes it more difficult for a professional party to seek to have a contract declared void on the basis of its 191 Comp. with Virally, supra note 110, at 381. 192 Loquin, supra note 114, at 173. See also Pierre Lalive, Transnational (or Truly International) Public Policy and International Arbitration, in JCCA CONGRESS SERJES NO. 3, COMPARATIVE ARBITRATION PRACTICE AND PUBLIC POLICY IN ARBITRATION 257 (P. Sanders ed., 1987), and, for a French version, 1986 REV. ARB. 329, 345. 193 See, for example, in French law, Patrice Jourdain, Le devoir de "se" renseigner (Contribution a l 'etude de /'obligation de renseignement), Dalloz, Chron. 139 (1983). On this issue, see also XAVIER BOUCOBZA, L'ACQUISITION INTERNATIONALE DE SOCIETE '1['1[ 673 et seq. (1998). 194 GEORGES RIPERT, LA REGLE MORALE ,r 43, cited by Y. Derains, observations following ICC Award No. 1990 (1972), Italian company v. Spanish company, 101 J.D.I. 897 (1974). 195 On the widely accepted idea that the doctrine of apparent authority serves to correct the absence of necessary powers, see Article 11 of the June 19, 1980 Rome Convention on the Law Applicable to Contractual Obligations. See also on this issue, with regard to state contracts, Audit; supra note 51, at 38 et seq. Compare, with regard to the arbitration clause, supra para. 470..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 822 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE own mistake.196 In some cases, that principle has been extended to mean that "an error of fact or law cannot be recognized in international commercial relations, as it is incompatible with the presumption of competence established through usage."197 Once again, it would no doubt be sufficient-at least with regard to errors of fact-for the effect of this presumption of competence to be to increase the burden of proof on the party seeking to rely on its own error. It certainly cannot be excluded that in some circumstances an error of fact, even one committed by a professional, might lead to a contract being held void. 1466. - The principles of apparent authority and the presumption of competence tend to favor the validity of contracts. However, this is not to say that there is a general principle of favor validitatis.198 The validity of a contract, in itself, is not something deserving protection. Instead, that validity is conditioned on the compliance with the applicable rules of law, be they those of a national law or general principles. 199 In fact, a number of general principles tend to clarify the conditions under which a contract can be held void. 1467. -As in national laws, the aim of some general principles is to protect only one of the parties. Thus, for example, arbitrators would have no difficulty in finding rules in comparative law as to vitiated consent which are accepted on a sufficiently wide scale to be considered as forming general principles of international commercial law.200 In the same vein, it has sometimes been argued that the unlawfulness of the abuse of a dominant economic position is also a general principle.201 1468. - By contrast, some principles are based on the protection of the general interest. In particular, arbitral case law has established a principle that contracts obtained by corruption are void. Early awards referred to the existence of 196 See ICC Award No. 1990 (1972), Italian company v. Spanish company, 101 J.D.l. 897 (I 974), and observations by Y. Derains; ICC Award No. 3776 (1982), cited by Guy Horsmans, l 'interpretation des contrats internationau.x, in L'APPORT DE LA JURISPRUDENCE ARBITRALE, supra note 113, at 123, 146; the October 27, 1975 Award by the Czechoslovak Chamber of Commerce, id. at 146. 197 Loquin, supra note I 14, at 169. 1" But see ICC Award No. 4145 (1984), supra note 64. 199 On the different question of the principle of interpretation whereby sense should be given to the provisions agreed by the parties, see infra para. 1471. "" On the affirmation that "contractual principles such as the invalidity of contracts where the parties' consent is defective are general principles of Jaw which are applicable here," see ICC Award No. 3327 (I 98 I), French company v. African state, 109 J.D.I. 971 (1982), and observations by Y. Derains. On the affirmation of the general principle that misrepresentation constitutes a cause of nullity of contracts, see the award cited by FOUCHARD, supra note 112, at 433. Compare the more conservative position taken by Paulsson, supra note 88, at 96, which, in our view, overestimates the differences in national laws on these issues although, admittedly, the terminology used differs significantly from one jurisdiction to the next. 201 Kahn, supra note 180, at 3 I7. But see the reservations expressed by DE BOISSESON, supra note 41, at 636. Compare, for the idea that the lifting of the corporate veil can be based on lex mercatoria, with ICC Award No. 8385 (1995), U.S. company v. Belgian company, 124 J.D.I. 1061 (1997), and observations by Y. Derains..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 823 a general principle of law recognized by civilized nations that contracts which seriously violate bonos mores or international public policy are invalid or at least unenforceable and that they cannot be sanctioned by courts or arbitrators.202 In later cases, the arbitrators did not find such disputes to be non-arbitrable or that the nemo auditur principle applied, but instead held the contract in question to be void.203 Thus, for example, where a fictitious contract was designed to provide a party with credit to which it was not entitled, a 1982 ICC award made in Case No. 2730 found the transaction in question to be contrary not only to Yugoslavian legislation [which was held to be applicable to the contract] but also to morals and bonos mores. In general, any contract the object of which is contrary to mandatory laws, rules of public policy, morals and bonos mores will be void This principle is accepted in all countries and by all legal systems. It constitutes an international rule, an element of the ordinary law of contract in international transactions.204 2112 ICC Award No. I I IO (1963) by Mr. G. Lagergren, Mr. X, Buenos Aires v. Company A, IO ARB. INT'L 282, 116 at 293 (I 994). 201 See, e.g., ICC Award No. 3916 (1982), Iranian party v. Greek party, 111 J.D.I. 930 (1984), and observations by S. Jarvin; ICC Award No. 3913 (1981), cited by Y. Derains, observations following ICC Award No. 2730 (1982), Two Yugoslavian companies v. Dutch and Swiss group companies, 111 JD.I. 914, 920 (1984); ICC Award No. 5943 (1990), 123 J.D.I. 1014 (1996), and observations by D. Hascher. 204 Supra note 204, at 917-18. On the issue of the nullity of contracts for corruption, see EXTORTION AND BRIBERY IN BUSINESS TRANSACTIONS (ICC Publication No. 315, 1977); Ahmed S. El Kosheri and Philippe Leboulanger, L'arbitrage face a la corruption et aux trajics d'injluence, 1984 REV. ARB. 3; Fran1,ois Knoepfler, Corruption et arbitrage international, in LES CONTRATS DE DISTRIBUTION - CONTRIBUTIONS OFFERTES AU PROFESSEUR FRANCOIS DESSEMONTET A L'OCCASION DE SES 50 ANS 357 (1998); Loquin, supra note 114, at 180; Lalive, supra note 193, at 345; Kahn, supra note I 80, at 314. For a more reserved position on the ground that the nullity of contracts for corruption is less frequently pronounced than is sometimes alleged to be the case, see Bruno Oppetit, Le paradoxe de la corruption a l'epreuve du droit du commerce international, 114 J.D.I. 5 (1987). The broad ratification of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, signed in Paris on December 17, 1997, should put an end to this minority view. See also ICC Award No. 5622 (Geneva, Aug. 19, 1988), Hilmarton v. OTV (I 993 REV. ARB. 327, and the commentary by Vincent Heuze, La morale, I 'arbitre et le Juge, id. at 179; 1992 RIV. DELL'ARB. 773, and A. Giardina's note; for an English translation, see XIX Y.B. COM. ARB. 105 (1994)) and, on the subsequent proceedings to which this award gave rise, infra para 1595; for a case where the arbitrators considered that corruption could lead to the nullity of the contract but where there was insufficient evidence of such corruption, see the March 21, 1992 ICC Award upheld by CA Paris, Sept. 30, 1993, European Gas Turbines v. Westman International Ltd., 1994 REV. ARB. 359, and D. Bureau's note; 1994 REV. CRIT. DIP 349, and V. Heuze's note; 1994 RTD COM. 703, and observations by J.-C. Dubarry and E. Loquin; 1994 BULL. ASA 105, and the commentary by Adel Nassar, Ordre public international el arbitrage? Ya-I-ii eu une evolution?, id. at 110; XX Y.B. COM. ARB. 198 (1995); ICC Award No. 7047 (Feb. 28, I 994), by H. Raeschke-Kessler, chairman, J. Patry and D. Mitrovic, arbitrators, Corporation W. v. State Agency F., 1995 BULL. ASA 301, upheld by Swiss Fed. Trib., Dec. 30, 1994, 1995 BULL. ASA 217; 1996 REV. SUISSE DR.'INT. ET DR. EUR. 545, and observations by P. Schweizer. See also the awards cited supra para. 586..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 824 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE Authors generally favor the approach whereby an arbitrator dealing with an illegal contract should not decline jurisdiction, but should instead declare the contract to be void.205 The only situation in which it is unclear if this is still true is that where neither party requests the arbitral tribunal to rule on the issue of nullity. This would leave the arbitrators with no other choice than to ignore the issue of nullity or to resign if they believe that they should not become involved in a breach of international public policy.206 Similarly, the general principle that contracts contravening "public morality" are void might affect contracts such as those which facilitate drug trafficking, terrorism, agreements intended to incite subversion (the hiring of mercenaries, for example) and human rights violations.207 The protection of humanity's cultural heritage, as illustrated in particular by the work of UNESCO, can also provide a basis for the creation of general principles. This was discussed at length in the Pyramids case.208 Likewise, antitrust law has also given rise to an analysis in terms of general principles.209 b) Principles Relating to the Interpretation of Contracts 1469. - Arbitral case law recognizes the existence of a number of principles concerning the interpretation ofcontracts.210 These principles are fairly similar to Articles 1156 et seq. of the French Civil Code,211 and comparable provisions in other legal systems, and even more so to the UNIDROIT Principles oflnternational Commercial Contracts.212 2115 See Berthold Goldman, The Complementary Roles of Judges and Arbitrators in Ensuring that International Commercial Arbitration is Effective, in INTERNATIONAL ARBITRATION - 60 YEARS OF ICC ARBITRATION -A LOOK AT THE FUTURE 257,272 (ICC Publication No. 412, 1984); El Kosheri and Leboulanger, supra note 205, at 14; Lalive, supra note 193, at 337. More generally, on the arbitrability of issues of corruption, see supra para. 586. 206 See Pierre Mayer, La regle morale dans !'arbitrage international, in ETUDES OFFERTES A PIERRE BELLET 379, , 34 (1991). On the fact that these principles are part of international public policy, see infra para. 1535. 207 See Lalive, supra note 193, at 34 I. 208 See supra para. 508 and especially Kahn, supra note I80, at 3 I 7-18; DE BOISSESON, supra note 41, at 639. 2"' See Jean-Hubert Moitry, Arbitrage international et droit de la concurrence: vers un ordre public de la lex mercatoria?, 1989 REV. ARB. 3. But see Laurence ldot, Les corrflits de lois en droit de la concurrence, 122 J.D.I. 321,328 (1995). 2111 On this issue, generally, see Philippe Kahn, L'interpretation des contrats internationaux, 108 J.D.I. 5 (1981); Horsmans, supra note 197; FOUCHARD, supra note 112, at 434 et seq. On the principles of construction of arbitration agreements, see supra paras. 476 et seq. 211 See, e.g., ICC Award No. 1434 (1975), supra note 14. On these rules, see especially Jacques Dupichot, Pour un retour aux textes: defense et illustration du "petit guide-tine" des articles I I 56 a I I64 du Code civil, in ETUDES OFFERTES A JACQUES FLOUR 179 (1979); CORNU, supra note 185, ,, 44 et seq. See also 1. LOPEZ SANTA MARIA, LES SYSTEMES D'INTERPRETATION DES CONTRATS (Thesis, University of Paris (France), 1968), with a foreword by J. Flour. 212 Supranote 118,especiallyArts.4.l to4.8,at90-IOO..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 825 I 470. - The most general principle of contractual interpretation is that contracts should be interpreted in good faith.213 Despite the tendency for many parties to see bad faith in any interpretation whereby one of the parties seeks to limit its undertakings, bad faith cannot be defined by reference to the restrictive or extensive nature of the interpretation proposed. A party only interprets a contract in bad faith where the interpretation it puts forward at the time of the dispute does not coincide with what the parties genuinely intended when they signed the contract. The requirement that contracts be interpreted in good faith is merely another way of saying that a literal interpretation should not prevail over an interpretation reflecting the parties' true intentions. As observed in an early award, "the fundamental principle of good faith ... entails searching for the common intention of ... the parties."214 Similarly, in the Aramco award of August 23, 1958, it was held that "the interpreter must ... remember that the Parties intended by their agreements to establish a reasonable contractual situation, in conformity with the common aim they had in view."215 Likewise, the award made in 1975 in ICC Case No. 1434 stated that: the disputed limitation of liability clause should be interpreted in the light of general principles of the interpretation of contracts, and particularly those which appear in Articles 1156 et seq. of the [French] Civil Code, beginning with a literal and grammatical interpretation of the words used, without failing to place them in their context and to consider the contract as a whole, so as to discover the genuine common intention of the parties, referring in particular, if the terms are ambiguous, to the principle of good faith (cf. Article 1134 Civil Code) and resorting, if need be, to extrinsic interpretational indicators, which may be found, for example, in the historic context and in the relations between the parties.216 I 471. - The principle of effectiveness, whereby "it should be assumed that the authors of a clause intended it to have a real significance and impact,"217 is also applied in arbitral practice. As set forth in the 1975 award in ICC Case No. 1434, m See, e.g., ICC Award No. 2291 (1975), French transporter v. English company, 103 J.D.I. 989 (1976), and observations by Y. Derains; the September 25, 1983 Jurisdictional Decision in Amco, supra note 177. 214 Award of June I 0, 1955 by President Cassin, Gouvemement Royal Hellenique v. Gouvernement de sa Majeste Britannique, 1956 REV. CRIT. DIP 279, and H. Batiffol's note; 1956 REV. ARB. 15. 215 Supra note 47, 27 !NT'L L. REP. 173 (1963); for a French translation, see 1963 REV. CRIT. DIP 272, 3 I 9. See also the reasons given for an award made by a Dutch arbitrator on December 23, 1932, according to which the examination of the contract "cannot be limited to its literal terms as contracts must be performed in good faith" (European company v. European company cited by FOUCHARD, supra note 112, 619 at 439). 21<• Supra note 14. With respect to the arbitration agreement, see supra P<!ra. 477. 217 See the June I 0, 1955 Award by President Cassin, supra note 215..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 826 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE there is a universally-recognized rule of interpretation whereby, if the terms of a contract are capable of two contrary interpretations or can convey two different meanings, one should favor the interpretation which gives a certain effect to the words, rather than the interpretation which renders them redundant or even absurd. This 'principle of useful effect,' which is also known as 'the effectiveness principle' (ut res magis valeat quam pereat) is endorsed, in particular, by Article 1157 of the [French] Civil Code.218 1472. -The arbitrators will also take into account the conduct of the parties subsequent to their entry into the contract and until the dispute arises, as that conduct will reflect the parties' own interpretation of the disputed contract on entering into it. This rule of interpretation is sometimes described as "practical and quasi-authentic interpretation," "contemporary practical interpretation" or "proof by the subsequent conduct of the parties."219 It can be applied in situations such as that where a party has performed the contract, without reserving its rights, under conditions different to those initially provided for.220 1473. - It has sometimes been suggested that there is a principle whereby silence should be interpreted as acquiescence.221 One author rightly criticized that proposition, noting that no such principle was accepted in English law.222 In fact, there is no such rule in continental legal systems either,223 and it cannot therefore be considered as constituting a general principle.224 218 ICC Award No. 1434 (1975), supra note 14. See also ICC Award No. 3380 (1980), Italian entreprise v. Syrian enterprise, 108 J.D.I. 927 (1981), and observations by Y. Derains; for an English translation, see VII Y.B. COM. ARB. I 16 (1982); ICC Award No. 3460 (1980), French company v. Ministry ofan Arab country, 108 J.D.I. 939 (1981), and observations by Y. Derains; the March 24, 1982 ad hoc Award in AMINOIL, supra note 56, 1 89; the September 25, 1983 Jurisdictional Decision in Amco, supra note 177; ICC Award No. 8365 (I 996), supra note I 09; ICC Award No. 8331 (I 996), supra note 173. See also Paulsson, supra note 88, at 92; SCHMIITHOFF, supra note 110,170; with respect to the arbitration agreement, see supra para. 478. 219 See, e.g., the August 23, 1958 Award in ARAMCO, supra note 47, 27 INT'L L. REP. 197-98 (1963); 1963 REV. CRIT. DIP 338; ICC Award No. 7792 (1994), 122 J.D.I. 993 (1995), and observations by D. Hascher. 2211 Compare, on the "presumption of acquiescence to an act of performance different from that defined by the contract," Loquin, supra note 114, at I 75. With respect to the arbitration agreement, see supra para. 477. 221 See ICC Award No. 543 (1934), French company v. Belgian company, cited by FOUCHARD, supra note I 12, 1615 at 432; ICC Award No. 3344 (1981), Arab State Enterprise v. Arab State Enterprise, 109 J.D.I. 978 (1982), and observations by Y. Derains; ICC Award No. 8365 (1996), supra note 109. 222 Mustill, supra note 116, at 177, n. 106. Comp. with Loquin, supra para. 1459 and note 114. 221 See, for example, in French law, JACQUES GHESTIN, TRAITE DES CONTRATS-LA VENTE 1120 (1990); HENRI AND LEON MAZEAUD, JEAN MAZEAUD, FRAN(OIS CHABAS, LE<;:ONS DE DROIT CIVIL - TOME II / PREMIER VOLUME-OBLIGATIONS 1137 (F. Chabas ed., 9th ed. I 998). 214 But see Paulsson, supra note 88, at 89..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 827 1474. - There is, however, a principle of consistency whereby within a particular document a recurring word is deemed to have the same meaning throughout.225 This rule is set forth in more general terms in Article 1161 of the French Civil Code, which states that "all clauses of a contract are interpreted one by reference to another, the meaning of each clause being determined in the light of the entire document." The need for an interpretation of the contract or of its various constituent parts as a whole has also been recognized in arbitral case law.226 1475. -Although there have been fewer opportunities to apply it in arbitral case law, there is also a general principle whereby, if in doubt, a clause should be interpreted contra proferentem, or against the party that drafted it. This rule is usually, although not exclusively, applied when construing contracts of adhesion. It prevents the party that drafted the disputed provision from relying on any ambiguity in that provision in support of a position which is favorable to that party but which was not made clear when the provision was drafted. In other words, the rule requires the party drafting the provision in question to enlighten the other party as to what might be the least favorable interpretation from the other party's point of view. As a result there should be no temptation for the party drafting the terms of the contract to leave deliberate ambiguities in the hope of exploiting them at a later stage.227 1476. - Contractual interpretation is not based exclusively on intrinsic factors. It has been held that the parties' intentions should be examined in context and, in particular, in the light of current usages in the relevant business sector. In the absence of any indication to the contrary, the parties will be deemed to have agreed that such usages should apply.228 1477. - Lastly, it is a generally recognized principle that arbitrators are not bound by the characterization given by the parties to their contract. In the same way as the courts, arbitrators are entitled to recharacterize the parties' agreements as they see fit.229 Given the convergence of different legal systems on this issue, the existence of such a principle is not in doubt. However, the arbitral awards usually cited in support of its existence are irrelevant, 225 See, e.g., ICC Award No. 1434 (1975), supra note 14, and Kahn, supra note 211, at 18. 226 See, e.g., ICC Award No. 1434 (1975), supra note 14, and the September 25, 1983 Jurisdictional Decision in Amco, supra note 177, 23 I.L.M. 377 et seq. (1984); 113 J.0.1. 218 et seq. (1986), and the observations by E. Gaillard at 231. With respect to the arbitration agreement, see supra para. 477. 227 See, e.g., ICC Award No. 2795 (1977), Swiss buyer v. Enterprise of socialist country, seller, IV Y.B. COM. ARB. 210 (1979). Comp. with ICC Award No. 3460 (1980), supra note 219; the April 26, 1993 Award under the aegis of the Society of Maritime Arbitrators, Inc., New York, in Case No. 2972, Nordic American Shipping A/S v. Bayoil (USA) Inc., XX Y.B. COM. ARB. 126, 131 (1995). See also Art. 4.6 of the UNIDROIT Principles, supra note 118. With respect to the arbitration agreement, see supra para. 479. "" See, e.g., ICC Award No. 2583 (1976), Spanish contractor v. Libyan owner, 104 J.O.1. 950 (1977), and observations by Y. Derains. 229 Goldman, La lex mercatoria dans /es con/rats et /'arbitrage internationaux: realite et perspectives, supra note 88, at 489; Paulsson, supra note 88, at 92..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 828 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE as one involved recharacterizing the parties' claims230 and in the other Moroccan law applied.231 c) Principles Relating to the Performance of Contracts 1478. - Some principles help to clarify the parties' obligations in the performance of their contracts. 1479. -Arbitrators often apply the principle found in Article 1134, paragraph 3 of the French Civil Code, as well as in many subsequent codifications in civil law systems,232 according to which "contracts must be performed in good faith."233 Again,234 the principle of good faith is often simply another way of formulating the principle that the failure to perform contractual obligations renders the defaulting party liable.235 1480. - The question of whether the parties' obligations should be assessed differently in economic development contracts is too controversial to generate general principles of law.236 On the other hand, there appears to be no doubt that contracts which require long- term cooperation between the parties can give rise to specific principles.237 1481. - It is in the context of these long-term contracts that the obligation to keep one's co-contractor fully informed, which was expressed in the Klockner award as "the duty of full disclosure," is at its strongest. 238 However, the requirement that each party inform its co- no ICC Award No. 3540 (1980), supra note 183. 211 ICC Award No. 3243 (1981), U.S. company v. Moroccan company, 109 J.D.I. 968 (1982), and observations by Y. Derains. See also, on the basis of Portuguese law, ICC Award No. 7518 (1994), Italian party v. Portuguese party, 125 J.D.I. 1034 (1998), and observations by Y. Derains. 212 See, for example, Article 148 of the Egyptian Civil Code, which was used as a model in many other Arab countries. m See, e.g., ICC Award No. 3131 (Oct. 26, 1979), Norsolor, supra note 183, and the commentary by Berthold Goldman, Une bataillejudiciaire autour de la lex mercatoria - L'affaire Norsolor, 1983 REV. ARB. 379. On this issue in the context of state contracts, see Pierre Lalive, Sur la bonne Joi dans I'execution des con/rats d'£tat, in MELANGES OFFERTS A RAYMOND VANDER ELST 425 (1986). 2.1, See supra para. 1461. m See, for example, the Norso/or award, supra note 183. m, In favor of a specific assessment of such contracts, see, for example, Patrick Rambaud, L'annulation des sentences K/ockner et Amco, 32 AFDI 259 (1986); the January 19, 1977 Texaco Award by R.-J. Dupuy, supra note 56; but see the October 21, 1983 Award in Klockner, subsequently annulled on different grounds, supra note 140, l l I J.D.I. 426 (1984), and observations by E. Gaillard, 114 J.D.I. 141 (1987). See also Prosper Weil, Droil international el con/rats d'Eta/, in MELANGES OFFERTS A PAUL REUTER - LE DROIT INTERNATIONAL: UNITE ET DIVERSITE 549 (1981); Kahn, supra note 51. 217 Gerard Morin, le devoir de cooperation dans /es con/rats internalionaux - Droil et pralique, 1980 DPCI 9, 13. "' Supra note 140. See also Loquin, supra note 114, at 179 et seq., according to which it is a general principle of law, and Audit, supra note 51, at 111..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 829 contractor of circumstances liable to jeopardize the performance of the contract has sometimes been presented as a rule with a more general scope. Thus, as observed in an ICC award made in 1985, "the parties' obligation to collaborate with a view to ensuring that the contract is properly performed imposes ... on each party a duty to inform, in particular."239 1482. - It is also in relation to long-term contracts that the question arises as to whether the doctrine of change in circumstances ("imprevision") is a general principle.240 Awards sometimes state in general terms that the parties' reciprocal obligations should be properly balanced as a matter of principle. For example, in the 1975 award in ICC Case No. 2291, the arbitral tribunal observed that: any commercial transaction is based on a balance between the reciprocal obligations and to deny that principle would amount to deprive commercial contracts of all certainty, and to have them based on speculation or chance. Lex mercatoria contains a rule whereby the obligations should remain balanced from a financial point ofview.241 Similarly, it was held in another award that: in an international contract concluded without any speculative intention, the parties can be considered, in the absence of an express agreement, to have wanted a guarantee against devaluation; furthermore, it would be contrary to good faith if the government of a State, having ordered and received services, were to refuse to pay for them at their true value, thereby intending to benefit from a substantial devaluation of the payment currency.242 m Award cited by Sigvard Jarvin, L'obligation de cooperer de bonne Joi; Exemples d'application au plan de /'arbitrage international, in L 'APPORT DE LA JURISPRUDENCE ARBITRALE, supra note I I 3, at 157, 167-68. See also ICC Award No. 3093 (1979), supra note 60. On this issue, see also Piero Bernardini, Is the Duty to Cooperate in Long-Term Contracts a Substantive Transnational Rule in International Commercial Arbitration?, in TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION, supra note 88, at 137. On the corresponding obligation of reasonable diligence in seeking out information, see supra para. 1464. 240 On this issue, see especially Denis Philippe, "Pacta sun/ servanda" et "Rebus sic stantibus ", in L 'APPORT DE LA JURISPRUDENCE ARBITRALE, supra note 113 at 181; ANTOINE KASSIS, THEORIE GENERALE DES USAGES DU COMMERCE ,r,r 548 et seq. (1984); Paulsson, supra note 88, at 95. 241 Supra note 214. See also SCHMITTHOFF, supra note 110, ,r 70. 242 Ad hoc Award of July 2, 1956 by Messrs. Ripert and Panchaud, Societe Europeenne d'Etudes et d'Entreprises v. Republique federale de Yougoslavie, 86 J.D.I. I 074 (1959), and the statement of the Yugoslav Government in connection with the arbitral award, 87 J.D.I. 760 (1960). See also Guy Horsmans and Michel Verwilghen, Stabilite et evolution du contra/ economique international, in LE CONTRAT ECONOMIQUE INTERNATIONAL - STABILITE ET EVOLUTION 451 (Report of the Vile Journees d'etudesjurldiques Jean Dabin, held at Louvain- la-Neuve (Belgium) on November 22-23, 1973 (1975))..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 830 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE However, arbitrators will not generally go so far as to conclude that, on the basis of general principles, they can adapt a contract to meet a change in economic circumstances,243 unless of course the parties have so provided by means of a hardship clause. 244 This is an appropriate solution, given the significant divergence of views among different legal systems as to the admissibility of the change in circumstances doctrine in private law.245 1483. - However, arbitral case law tends to recognize that in long-term contracts the parties have a duty to re-negotiate in good faith. Arbitral case law also tends to reject, in this context, the English doctrine according to which an "agreement to agree" has no binding effect.246 1484. - Other principles serve to determine the consequences of the failure by a party to perform its contractual obligations. 1485. -Arbitral case law has established a general principle that the failure to perform a contract renders the defaulting party liable.247 1486. - The fact that the co-contractor of a defaulting party can rely on that party's failure to perform to withhold performance itself has also been held to be a transnational rule.248 The award rendered in 1980 in ICC Case No. 3540 states that "the non adimpleti 243 See, for example, the reservations expressed in ICC Award No. 1512 (1971), Indian cement company v. Pakistani bank, I Y.B. COM. ARB. 128 (1976); for a French translation, see IOI J.D.I. 904 (1974), and observations by Y. Derains; ICC Award No. 2404 (1975), Belgian seller v. Romanian purchaser, I 03 J.D.J. 995 (1976), and observations by Y. Derains. See also Goldman, la lex mercatoria dans /es con/rats et I'arbitrage internationaux: rea/ite et perspectives, supra note 88, at 495. On this issue, generally, see Hans van Houtte, Changed Circumstances and Pac/a Sun/ Servanda, in TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION, supra note 88, at 105. 244 On this issue, see supra paras. 35 et seq. 245 For a comparative law analysis, see Rene David, l 'imprevision dans /es droits europeens, in ETUDES OFFERTES A ALFRED JAUFFRET 211 (1974). For the position of the UNJDROIT principles with respect to hardship, see Articles 6.1.2 to 6.2.3; see also P. Kahn, review of the Principles in 121 J.D.I. 1115 (1994). For an application of the doctrine of change in circumstances under Algerian law, which expressly accepts the rule, see, for example, the ad hoc Award rendered in Paris on December 29, 1993 by D.G. Wright, chairman, P. Mayer and C. Molineaux, arbitrators (C. Molineaux dissenting), lcori Estero S.p.A. v. Kuwait Foreign Trading Contracting & Investment Co., 9 INT'L ARB. REP. Al (Dec. 1994). For an example of the refusal to apply the doctrine of change in circumstances recognized, within certain limits, by Dutch law, see ICC Award No. 8486 (1996), Dutch party v. Turkish party, 125 J.D.J. 1047 (1998), and observations by Y. Derains. w, On the duty to renegotiate in good faith, see, for example, ICC Award No. 2291 (1975): "reasonable re- negotiation [is] customary in international contracts" (supra note 214); ICC Award No. 8365 (1996), supra note 109. See also Loquin, supra note 114, at 175 and, on the similar concept of the "equal sharing of the burden of risks," at 178; Goldman, la lex mercatoria dans !es con/rats et I'arbitrage internationaux: rea/ite et perspectives, supra note 88, at 492. On the fact that the invalidity of an "agreement to agree" is not a transnational rule, see ICC Award No. 8540 (Sept. 4, 1996), unpublished. 247 See, e.g., ICC Award No. 313 I (Oct. 26, 1979), Norsolor, supra.note I 83, and Kahn, supra note 180, at 321. 24' See, e.g., ICC Award No. 2583 (I 976), supra note 229..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 831 contractus rule ... should be considered as belonging to the general principles of law forming the lex mercatoria."249 Awards generally provide that this principle is not effective where the failure to perform relied on by the co-contractor is of far less significance than its own non-performed obligations. In other words, a party can only properly withhold performance if it complies with the principle ofproportionality.250 As one author has observed, "it would be contrary to good faith to rely on ... the non-performance of a relatively minor obligation in an attempt to avoid performance of an essential obligation of one's own."251 1487. - Termination of the contract for failure to perform or lack of proper performance, which is closely related to the withholding of performance, is also considered by some arbitrators to be a general principle of law.252 1488. - The release of a party from its obligations by an event satisfying the conditions of force majeure,253 and the fact that force majeure has a purely suspensive effect, 254 provided that it is not long-lasting,255 are also recognized as general principles.256 24' Supra note 183. See also ICC Award No. 7539 (1995), French company v. Greek company, 123 J.D.I. 1030 (1996), and observations by Y. Derains; the October 21, 1983 Award in Klockner, supra note 140, and observations by E. Gaillard, 114 JD.I. 142 (1987); ICC Award No. 8365 (1996), supra note 109; Paulsson, supra note 88, at 93. On this issue, see Philip D. O'Neill, Jr. and Nawaf Salam, Is the Exceptio Non Adimpleti Contractus Part of the New Lex Mercatoria?, in TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION, supra note 88, at 147. 25" For another application of this principle, see i,ifra para. I496. 251 JEAN CARBONNIER, DROIT CIVIL - Vol. 4- LES OBLIGATIONS 84, considered to reflect a rule of lex mercatoria by Y. Derains, observations following ICC Award No. 2583 (1976), Spanish contractor v. Libyan owner, 104 JD.I. 950, 951 (1977). See also the October 21, 1983 Klockner Award, supra note I 40, and the observations by E. Gaillard, 114 JD.I. 143 (1987). On whether there is a general principle under which the right to withhold perfonnance is subject to the prior fonnal notification by the party invoking it to its co-contractor, see Gaillard, id. at 143-44 (1987). 252 Compare, on the effect of express termination clauses, ICC Award No. 2520 (1975), Two Czechoslovak companies v. Italian company, 103 JD.I. 992 (1976), and observations by Y. Derains. m Compare, on the definition offorce majeure, ICC Award No. 2478 (1974), which was subject to Swiss law, but was expressed in general terms (French company v. Romanian company, 102 J.D.I. 925 (1975), and observations by Y. Derains); ICC Award No. 2142 (1974), 101 J.D.I. 892 (1974), and observations by R.T. 254 See, for example, the November 25, 1971 Preliminary Award in ICC Award No. 1703, Societt\ Gt\nerale de l'Industrie du Papier "RAK.TA" v. Parsons and Whittmore Overseas Co., Inc., reprinted in J GILLIS WETTER, THE INTERNATIONAL ARBITRAL PROCESS: PUBLIC AND PRJVATE, Vol. V, at 361, 369 (1979); for a French translation, see IOI J.D.I. 894 (1974), and observations by R. Thompson. Comp. with ICC Award No. 7539 ( I 995), supra note 250. ,s; On the consequences of the long-lasting embargo against Iraq, held to be a cause of termination of a construction contract, see ICC Award No. 8095 (Sept. 25, 1997), unpublished. 25" On this issue, see David W. Rivkin, Lex Mercatoria and Force Majeure, in TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION, supra note 88, at 161; Henry Lesguillons, Pratique arbitrate concernant la "force mqjeure" et la 'frustration", in INADEMPlMENTO, ADATTAMENTO, ARBITRATO - PATOLOGIE DEi CONTRATTI E RJMEDI 457 (1992)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 832 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE 1489. - Another general principle will be that the party to which a non-performed obligation is owed cannot rely on the non-performance if it has not objected to that non- performance within a reasonable period oftime.257 1490. - Another set of general principles governs the evaluation of damages resulting from a total or partial failure to perform the contract.258 1491. - One of the most well-established general principles in arbitral case law is the duty of the party to which the non-performed obligation is owed to mitigate its losses.259 1492. - Arbitral case law also accepts the principle of full compensation for the loss sustained, with damages covering both the loss actually suffered and loss of profit.260 Certain distinctions are made in some cases regarding state contracts, depending on whether the 257 See, for example, ICC Award No. 2520 (1975), in which the arbitrators took into account, in their assessment of damages, the absence of any adverse reaction by one party to the failure by the other party to perform its obligations (supra note 253); ICC Award No. 8365 (1996), supra note 109. Compare, in a case governed by Moroccan law, ICC Award No. 3243 (1981), supra note 232. 258 On this issue, see Marcel Fontaine, JI danno risarcibi/e ne//a giurisprudenza arbitra/e de/la Camera di Commercio Jnternaziona/e, in INADEMPIMENTO, ADATTAMENTO, ARBITRATO - PATOLOGIE DEi CONTRATT! E RIMED! 541 (1992); JER6ME ORTSCHEIDT, LA REPARATION DU DOMMAGE DANS L'ARBITRAGE COMMERCIAL INTERNATIONAL (Thesis, University of Paris XII (France), 1999). 259 See, e.g., ICC Award No. 2478 (1974), supra note 254; ICC Award No. 3344 (1981), supra note 222; ICC Award No. 4761 (1987), Italian consortium v. Libyan company, I 14 JD.I. 1012 (1987), and observations by S. Jarvin; ICC Award No. 5910 (1988), Belgian purchaser v. Belgian seller, 115 JD.I. 1216 (1988), and observations by Y. Derains; ICC Award No. 5514 (1990), French company v. Government committed to the provision offinancing, 119 J.D.I. 1022, 1024-25 (1992), and observations by Y. Derains; ICC Award No. 6840 (1991), Egyptian seller v. Senegalese buyer, 119 J.D.I. I 030, 1034 (1992), and observations by Y. Derains; the June 5, 1990 Award by R. Higgins, president, M. Lalonde and P. Magid, arbitrators, in Amco, supra note 189, 5 INT'LARB. REP. D41 et seq. (Nov. 1990); I 18 JD.I. 178 (1991), and observations by E. Gaillard, especially at 187; on this issue, generally, see Yves Derains, L'obligation de minimiser le dommage dans /a jurisprudence arbitra/e, 1987 INT'L Bus. L.J. 375; Kahn, supra note 180, at 321-22; Loquin, supra note 114, at 177-78; Goldman, La lex mercatoria dans /es con/rats et I'arbitrage internationaux: rea/ite et perspectives, supra note 88, at 495. On the application of this rule in awards where different national laws apply, see the references cited by Y. Derains, observations following ICC Award No. 5910 (1988), supra, at 1222; in French law, see ICC Award No. 2404 (1975), supra note 244; see also CA Paris, le Ch., Sec. C, Dec. 8, 1998, Peter Van Vugt Agrow Products B.V. v. Hydro Agri France Nouvelle Denomination Hydro Azote, No. 1997/04763, unpublished; in English law, see ICC Award No. 5885 (1989), Seller v. Buyer, XVI Y.B. COM. ARB. 91 (1991); in Algerian law, see ICC Award No. 5865 (1989), supra note 15. For a convincing demonstration that, in spite of the fact that it is not formulated in the same way, this principle is recognized under French law, see ORTSCHEIDT, supra note 259, 'l['l[ 200 et seq. 2'"' See, e.g., ICC Award No. 1526 (1968), Belgian parties v. African state, IOI JD.I. 915 (1974), and observations by Y. Derains; the November 20, 1984 Award, set aside on other grounds, in Amco, supra note 183, 241.L.M. 1036 (1985); I 14 J.D.I. 155 (1987)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 833 dispute concerns a lawful261 or an unlawful262 expropriation. These distinctions remain, however, controversial. 1493. - In contrast, the rule whereby punitive damages can be awarded against the defaulting party in some circumstances is not sufficiently established in comparative law to be considered a general principle.263 1494. - However, in cases where the contract does stipulate that the arbitrators may make an award of damages exceeding the value of the actual loss, it is possible for them to apply a principle, based on comparative law, whereby the effects of excessive penalty clauses should be tempered. The precise remedy varies in different legal systems, but reducing the effects of penalty clauses (rather than holding such clauses void altogether) would be more in keeping with the spirit of international commercial law, particularly in cases where the parties have submitted their disputes to general principles of law or remained silent as to the applicable law.264 1495. - Some awards have held, by way of a general principle, that only direct and foreseeable losses are capable of giving rise to compensation. 265 1496. - In the case of partial non-performance, damages are to be assessed on the basis of what proportion of the entire set of obligations provided for in the contract has been performed.266 That, again, is an application of the principle ofproportionality.267 "'' On the recovery of compensation in cases of lawful expropriation, see the discussion in the June 5, 1990 Award in Amco, supra note 189, 5 INT'L ARB. REP. D41 et seq. (Nov. 1990); 118 J.D.I. 179 (1991), and observations by E. Gaillard, especially at 187. See also the May 20, 1992 Award by E. Jimenez de Arechaga, president, R. Pietrowski, Jr. and M. El Mahdi, arbitrators (M. El Mahdi dissenting), in ICSID Case No. ARB/84/3, Southern Pacific Properties (Middle East) Ltd. v. Arab Republic of Egypt, 8 ICSID REV. -FOREIGN INV. L.J. 328 (1993); 32 l.L.M. 933 (1993), with correction at 32 l.L.M. 1470 (1993); XIX Y.B. COM. ARB. 51 (1994); 8 INT'L ARB. REP. Al (Aug. 1993); 3 ICSID REP. 189 (1995); for a French translation, see 121 J.D.l. 229 (1994), and observations by E. Gaillard. On the issue, see ORTSCHEIDT, supra note 259, i!'ll 426 et seq. 262 On the recovery of compensation in cases of unlawful expropriation, see, for example, the June 5, 1990 Award in Amco, supra note 189, 5 INT'L ARB. REP. D41 et seq. (Nov. 1990); 118 J.D.I. 187 (1991). 26J On this issue, see E. Allan Farnsworth, Punitive Damages in Arbitration, 7 ARB. INT'L 3 (1991); ORTSCHEIDT, supra note 259, '11'11604 et seq. But see, on the arbitrability of the question, supra para. 579. 264 See UNIDROIT Principles, supra note 118, Art. 7.4.13, para. 2; see infra para. 1556. "'5 ICC Award No. 1526 (1968), in which the arbitral tribunal reasoned in terms of general principles although it had declared a specific law to be applicable (supra note 261); ICC Award No. 2404 (1975), supra note 244; the November 20, 1984 Award in Amco, set aside on other grounds, supra note 183, 24 I.L.M. 1037 (1985); 114 J.D.I. 155 (1987); the June 5, 1990 Award in Amco, supra note 189, 5 INT'L ARB. REP. D41 et seq. (Nov. 1990); 118 J.D.I. 179 (1991), and observations by E. Gaillard, especially at 187. 266 See, for example, the November 1, 1978 ICC Award in Banque du Proche-Orient v. Fougerolle, upheld by CA Paris, June 12, 1980, 1981 REV. ARB. 292, and G. Couchez' note; 109 J.D.I. 931 (1982), 2d decision, and B. Oppetit's note. 267 See supra para. 1486..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 834 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE 1497. - It is even possible that an issue as technical as the method of calculating reparable loss could give rise to general principles.268 1498. - Likewise, the conditions governing the set-off of the respective sums which parties to a contract may owe one another have been treated as general principles in some awards.269 We may also witness the development of transnational rules governing interest.270 1499. - To summarize, it is essential to recognize that the system of general principles cannot be reduced to the application of a list of rules which have already been formally codified, but that it consists instead of a method enabling the underlying principles of comparative law to be uncovered, if required.271 It is hard to deny that such a method is an appropriate tool for resolving all disputes liable to arise out of contracts which the parties intended to be governed by transnational rules or to which arbitrators choose to apply transnational rules where the parties fail to elect a governing law.272 26' On this issue, particularly in the context of state contracts, see Ignaz Seidl-Hohenveldern, l 'evaluation des dommages dans /es arbitrages transnationaux, 33 AFDI 7 (1987); William C. Lieblich, Determinations by International Tribunals of the Economic Value of Expropriated Enterprises, 7 J. INT'L ARB. 37 (Mar. 1990). On this issue, generally, see Bernard Hanotiau, La determination et /'evaluation du dommage reparable: principes generaux et principes en emergence, in TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION, supra note 88, at 209; Yves Derains, lnterets moratoires, dommages-interets compensatoires et dommages punitifs devant /'arbitre international, in ETUDES OFFERTES A PIERRE BELLET 100, especially at 114 et seq. (1991); ORTSCHEIDT, supra note 259, ,r,r 21 et seq. 269 See ICC Award No. 3540 (1980), supra note 183, and the observations by Kahn, supra note 180, at 323. See also Paulsson, supra note 88, at 93. See also Klaus Peter Berger, Set-Off in International Economic Arbitration, 15 ARB. INT'L 53 ( I 999). 270 Pierre A. Karrer, Transnational law of interest in International Arbitration, in TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION, supra note 88, at 223; Derains, supra note 269, at 102 et seq.; Yves Derains, lajurisprudence arbitrate de la Chambre de commerce internationa/e en matiere de monnaie de compte el de monnaie de paiement, in INADEMPIMENTO, ADATTAMENTO, ARBITRATO- PATOLOGIE DEi CONTRATTI E RIMED! 477 (1992); ORTSCHEIDT, supra note 259, ,, 482 et seq.; Herbert Schonle, lnterets moratoires, interets compensatoires et dommages-interets de retard en arbitrage international, in ETUDES DE DROIT INTERNATIONAL EN L'HONNEUR DE PIERRE LALIVE 649 (1993); Martin Hunter and Volker Triebel, Awarding Interest in international Arbitration - Some Observations Based on a Comparative Study of the laws of England and Germany, 6 J. INT'L ARB. 7 (Mar. 1989); David J. Branson and Richard E. Wallace, Jr., Awarding Interest in International Commercial Arbitration: Establishing a Uniform Approach, 28 VIRG. J. INT'L L. 919 (1988). On the starting point for interest, see the May 20, 1992 Award in Southern Pacific Properties, supra note 262. On the question of interest, see excerpts of!CC Awards No. 4629 (1989), No. 5428 (1988), No. 5440 (1991), No. 5597 (1990), No. 5694 (1989), No. 5721 (1990), No. 5731 (1989), No. 5789 (1988), No. 5864 (1989), No. 6162 (1990), and No. 6219 (1990), ICC BULLETIN, Vol. 3, No. I, at 15 el seq. (1992); No. 5029 (1991), No. 5285 (1992), No. 5289 (1986), No. 5324 (1989), No. 5834 (1989), No. 5881 (1989), No. 5900 (1989), No. 5904 (1989), No. 6058 (1990), No. 6075 (1990), No. 6256 (1990), No. 6281 (1989), No. 6360 (1990), and No. 6573 (1991), ICC BULLETIN, Vol. 3, No. 2, at 46 et seq. (1992); No. 8128 ( 1995), supra note 170. 271 See supra paras. 1458 and 1459. 272 See infra para. 1556..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 835 § 3. - Amiable Composition 1500. - Just as the parties can choose to have the resolution of their disputes governed by a national law or by transnational rules, they can also instruct the arbitrators to act as amiables compositeurs. 273 In France, Article 1497 of the New Code of Civil Procedure provides that "[t]he arbitrator shall rule as amiable compositeur if the agreement of the parties conferred this mission upon him or her." This provision was inspired by Article VII, paragraph 2 of the 1961 European Convention, which states that "[t]he arbitrators shall act as amiables compositeurs if the parties so decide and if they may do so under the law applicable to the arbitration." Article 1497 does not add the condition that the applicable law should allow amiable composition, as French law does so. This is hardly surprising, given that the concept of amiable composition is often considered as being a product of French law274 although, despite hesitations in common law countries, it is now recognized in most legal systems. 1501. -As with choice of law clauses, 275 French law contains no requirements as to the form of clauses providing for amiable composition. The only restriction is the requirement for a definite intention of the parties to resort to that particular method of dispute resolution. In the absence ofa common intention of the parties to that effect, arbitrators would "fail to comply with the terms of their brief'276 if they were to decide to act as amiables compositeurs, even if the parties had given no indication as to the law governing the dispute. To allow amiable composition only where the parties have expressly provided so is an approach widely accepted in comparative law.277 The 1965 Washington Convention takes the same position,278 as do most institutional arbitration rules.279 m On this issue, generally, see ERIC LOQUIN, L,AMIABLE COMPOSITION EN DROJT COMPARE ET INTERNATIONAL -CONTRIBUTION A L'ETUDE DU NON-DROIT DANS L'ARBITRAGE INTERNATIONAL (1980); Eric Loquin, Arbitrage -Instance arbitrate-Arbitrage de droit et amiable composition, J.-CL. PROC. CIV., Fasc. 1038 (1994); Ion I. Nestor, L'amiable compositeur et I'arbitrage selon !es reg/es du droit, in COMMERCIAL ARBITRATION - ESSAYS IN MEMORIAM EUGENIO MINOLI 341 (1974); PETER RIEDBERG, DER AMIABLE COMPOSITEUR IN INTERNATIONALEN PRIVATEN SCHIEDSGERICHTSVERFAHREN (1962). In ICSID arbitration, see Christoph Schreuer, Decisions Ex Aequo et Bono Under the JCSJD Convention, 11 ICSID REV. - FOREIGN INV. L.J. 37 (1996) 274 See, e.g., REDFERN AND HUNTER, supra note 3, at 36 et seq. 275 See supra para. 1427. 276 This is a ground for setting aside the award under Article 1502 3° of the French New Code of Civil Procedure; see infra paras. 1626 et seq., especially para. 1635. 277 See, e.g., Art. 1054(3) of the Netherlands Code of Civil Procedure; Art. 187, para. 2 of the Swiss Private International Law Statute; Art. 1700(1) of the Belgian Judicial Code (Law of May 19, 1998), which specifically excludes the possibility of public law entities resorting to amiable composition; Art. 28(3) of the UNCITRAL Model Law; Art. 1051(3) of the German ZPO (Law of Dec. 22, 1997). 278 Art. 42(3). See also the November 30, 1979 Award in AGIP, by J. Trolle, president, and R.-J. Dupuy and F. Rouhani, arbitrators, which refused to accept the suggestion of the state party to the dispute that the tribunal should rule in equity despite the fact that the contract provided that Congolese law would apply, supplemented, if necessary, by principles of international law (supra note 56); compare with the August 8, 1980 Award by (continued .. ).

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 836 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE 1502. - Nevertheless, considerable controversy remains as to the exact meaning of amiable composition and, in particular, as to the need to distinguish it from the concept of equity and from the arbitrators' power to rule ex aequo et bona. A distinction has sometimes been drawn between arbitration "in equity" as found in Switzerland, for example,280 and amiable composition under French law. It has been suggested that the former is "detached from legal rules, even if they are mandatory," while the latter merely allows the arbitrator, "ruling in law, to moderate the effects of the application of that [law]."281 The authors of the UNCITRAL Model Law preferred not to take sides in that debate, or indeed to restrict the parties' freedom by adopting a dogmatic approach. It therefore provides, at Article 28, paragraph 3, that "[t]he arbitral tribunal shall decide ex aequo et bona or as amiable compositeur only if the parties have expressly authorized it to do so." The same position prevails in the ICC Rules in force since January 1, 1998, whereby "[t]he Arbitral Tribunal shall assume the powers of an amiable compositeur or decide ex aequo et bona only if the parties have agreed to give it such powers" (Art. 17(3)).282 However, the distinction between amiable composition and equity seems artificial given that, in either case, the arbitrators could choose to have their sense of what justice requires prevail over any other consideration. The French courts appear to use the expressions "amiable composition" and "judgment in equity" interchangeably, often holding that arbitrators deciding as amiables compositeurs must "seek the fairest solution."283 However, unless otherwise specified by the 21• ( ... continued) J. Trolle, president, R. Bystricky and E. Razafindralambo, arbitrators, in Case No. ARB/77/2, S.A.R.L. Benvenuti & Bonfant v. Government of the People's Republic of the Congo, which records the agreement between the parties during the proceedings to confer powers of amiab/es compositeurs on the arbitrators (for an English translation, see 21 I.L.M. 740 (1982), with corrections at 21 l.L.M. 1478 (1982); VIII Y.B. COM. ARB. 144 (1983); I ICSID REP. 330 (1993)). 279 See, e.g., Art. 17(3) of the 1998 ICC Arbitration Rules (Art. 13(4) of the previous Rules); Art. 33(2) of the UNCITRAL Arbitration Rules; Art. 28(3) of the 1997 AAA International Arbitration Rules; Art. 22.4 of the 1998 LCIA Rules; Art. 24(3) of the 1999 Rules of the Stockholm Chamber of Commerce. 2"" Art. 31, para. 3 of the Swiss 1969 Concordat and Art. 187, para. 2 of the Swiss Private International Law Statute; Pierre Jolidon, La sentence en equite dans le Concordat suisse sur /'arbitrage, in ASSOCIATION SUISSE DE L'ARBITRAGE, RECUEIL DE TRAVAUX SUISSES SUR L'ARBITRAGE INTERNATIONAL 259 (C. Reymond and E. Bucher eds., 1984); ICC Award No. 6503 (1990), French company v. Spanish company, 122 J.D.I. 1022 (1995), and observations by Y. Derains. m LALIVE, POUDRET, REYMOND, supra note 2, at 401 and the references cited therein. Compare, in French law, the idea that equity is only one of the elements of amiable composition, LOQUIN, supra note 274, ,r,r 587 et seq. and in Italian law, RUBINO-SAMMARTANO, supra note 3, at 273. See also Mauro Rubino-Sammartano, Amiable Compositeur (Joint Mandate to Settle) and Ex Bono et Aequo (Discretiona/ Authority to Mitigate Strict Law) - Apparent Synonyms Revisited, 9 J. INT'L ARB. 5 (Mar. 1992); Otto Sandrock, "Ex aequo et bono"- und "Amiable composition"- Vereinbarungen: ihre Qua/ifikation, Ankniipfung und Wirkungen, in JAHRBUCH FOR DIE PRAXJS DER SCHIEDSGERJCHTSBARKEIT II, at I 20 (I 988); Gerardo Broggini, Reflexions sur I'£quite dans /'arbitrage international, 1991 BULL. ASA 95. m DERAINS AND SCHWARTZ, supra note 32, at 226 et seq. m CA Paris, Mar. 15, 1984, Soubaigne v. Limmareds Skogar, 1985 REV. ARB. 285, and the commentary by Eric Loquin, Pouvoirs et devoirs de /'amiable compositeur. Apropos de trois arrets de la Cour d'appel de Paris, id. at 199; CA Paris, May 6, 1988, Unijet S.A. v. S.A.R.L. lnternatronal Business Relations Ltd. (I.B.R.), 1989 REV. ARB. 83, and E. Loquin's note..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 837 parties, arbitrators acting as amiables compositeurs are in fact free to either apply a national law as a starting point, and then exclude its effects if need be,284 or to look directly for the solution which they consider to be most equitable.285 Amiable composition can thus be defined in an essentially negative fashion as the arbitrators' power not to restrict themselves to applying rules of law, thereby allowing them not only to ignore rules of law altogether, but also to depart from them to the extent that their conception of equity requires. 1503. - A 1981 award in ICC Case No. 3327, inspired by the views taken by one French commentator,286 described the philosophy of amiable composition asfollows: Arbitration, in this perspective, addresses aims different from those of conventional court proceedings. It is characterized by less emphasis on the legal nature of the dispute and more on its technical, psychological and commercial aspects. An amiable composition clause provides the arbitrator with a means to limit the bearing of law on the dispute and to give precedence to other factors, and it enables factual situations, which under a healthy commercial policy warrant different treatment, to be removed from the application ofrigid rules.287 1504. - The parties themselves sometimes provide indications as to the approach they expect the arbitrators to adopt. It is not unusual for them to combine an amiable composition clause with a clause selecting a governing Iaw.288 In such cases, the arbitrators will begin by applying the chosen law and will depart from it where they consider that it would lead to an inequitable result. 1505. - Where the parties have simply included an amiable composition clause without giving any further detail, the arbitrators are by no means obliged to apply a national law or transnational rules. It has sometimes been argued that in such cases the arbitrators ought to take into account general principles of law 2"' See, e.g., ICC Award No. 5118 (1986), Italian party v. Two Tunisian parties, 114 J.D.I. 1027 (1987), and observations by S. Jarvin; ICC Award No. 3755 (1988), ICC BULLETIN, Vol. I, No. 2, at 25 (1990). m See, e.g., ICC Award No. 5103 (1988), Three European companies v. Four Tunisian companies, 115 J.D.I. 1206 (1988), and observations by G. Aguilar Alvarez. m, LOQUIN, supra note 274, ,i 583. 287 Supra note 20 I. 288 See, e.g., ICC Award No. 2139 (1974), 102 J.D.I. 929 (1975), and observations by Y. Derains, at 920; ICC Award No. 2216 (1974), State-owned company, seller v. Norwegian purchaser, 102 J.D.I. 917 (1975), and observations by Y. Derains..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 838 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE a reference to equity or, in a different form, the instruction given to him or her to rule ex aequo et bona, should lead the arbitrator acting as amiable compositeur to take into account general principles of law and international trade practices. Interpreted in this way, an amiable composition clause can be considered as referring implicitly to lex mercatoria.289 It is true that arbitral tribunals resolving a dispute on the basis of equity tend to seek guidance from general principles rather than from a particular national law, even though they may ultimately depart from those principles if their direct application conflicts with the arbitrators' sense of what is equitable. 290 However, the temptation to assimilate amiable composition with the application of general principles of law should be avoided. Arbitrators deciding as amiables compositeurs are not in any way required to apply transnational rules.291 Conversely, the application of transnational rules by arbitrators does not necessarily require that the arbitrators be empowered to rule in equity, or indeed-and this is an essential difference between the regime of lex mercatoria and that of amiable composition-that the parties expressly empower the arbitrators to apply transnational rules, as those rules may be chosen by the arbitrators in the absence of any choice by the parties.292 There is in fact an historic explanation for this confusion. During the 1950s and 1960s, the aim of amiable composition was not simply to avoid the strict application of a national law. Commentators also considered it to be a means for the arbitrator to apply and, above all, to gradually develop the rules of lex mercatoria.293 As lex mercatoria now has more substance, its applicability no longer depends on the existence of an amiable composition '"' Goldman, La lex mercatoria dans /es contrats et /'arbitrage internationaux: realite et perspectives, supra 88, at 480-81. 29n See, e.g., ICC Award No. 3327 (1981), supra note 201; ICC Award No. 3267 (1979), Mexican construction company v. Belgian company (member of a consortium), VII Y.B. COM. ARB. 96 (1982); for a French translation, see 107 J.D.I. 961 (1980), and observations by Y. Derains; the November 3, 1977 ad hoc Award in Mechema Ltd. v. S.A. Mines, Minerais et Metaux, 1980 REV. ARB. 560, and J. Schapira's note; for an English translation, see VII Y.B. COM. ARB. 77 (1982). 291 See, e.g., ICC Award No. 3267 (1979), supra note 291; ICC Award No. 3742 (1983), European contractor v. Three Middle-Eastern state-owned entities, 111 J.D.I. 910 (1984), and observations by Y. Derains. See also LALIVE, POUDRET, REYMOND, supra note 2, at 402. 292 See infra para. 1556; compare, on the distinction between the two situations, Y. Derains, observations following ICC Award No. 3267 (1979), supra note 291, 107 J.D.I. 967 (1980); and, on the fact that a clause declaring the general principles of law and justice to be applicable does not give the arbitrators the powers of amiables compositeurs, see ICC Award No. 3380 (1980), supra note 219. See also Jean-Denis Bredin, A la recherche de l'Aequitas Mercatoria, in L'INTERNATIONALISATION DU DROIT- MELANGES EN L'HONNEUR DE YVON LOUSSOUARN 109 (I 994). 293 See, e.g., PHILIPPE KAHN, LA VENTE COMMERCIALE INTERNATIONALE 38 (1961); FOUCHARD, supra note 112, ,r 582..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 839 clause.294 In fact, an amiable composition clause will enable arbitrators to decide not to apply a general principle which they consider to be inequitable in the circumstances.295 1506. - On the other hand, arbitrators ruling in equity cannot be criticized for applying general principles of law, or even a particular national law if they consider that to be appropriate. Thus, in a case in which arbitrators empowered to act as amiables compositeurs reached their decision without making reference to equity, the Paris Court of Appeals refused to set aside the award for non-compliance by the arbitrators with the terms of their brief, on the grounds that the arbitrators had "necessarily been guided equally by rules of law and by their sense of equity."296 1507. - A more delicate issue-and one which is more indicative of the differences between certain legal systems-is whether arbitrators empowered to act as amiables compositeurs, or to rule in equity, can depart from the provisions of the contract where they consider that to apply them directly would lead to an unfair result. It has sometimes been argued that an arbitrator acting as amiable compositeur must observe the provisions of the disputed contract. In a 1982 award made in ICC Case No. 3938, it was held that: the view most widely accepted by authors and international arbitral practice is that an arbitrator acting as amiable compositeur remains bound by the contract ... ; the considerations which may lead the arbitrator to correct distortions which may result from a strict application of the provisions of the law to the particular circumstances of the case are not valid with regard to the contract, which is a special set of rules resulting from the parties' own intentions.297 Certain authors share that view and consider that an amiable compositeur cannot "directly transgress contractual provisions."298 The UNCITRAL Model Law provides some support for that position. Although in certain legal systems, including French law, amiable composition is the subject of a distinct statutory provision, the Model Law includes amiable composition in the article concerning the "Rules Applicable to Substance of Dispute" (Art. 28). Amiable composition is therefore also subject to paragraph 4 of the same Article, m On the decline of this "function as a substitute for the applicable law," see LOQUIN, supra note 274, ,i,i 562 et seq. and 570 et seq. 295 The content of paragraphs I and 2 of Article VII of the 1961 European Convention, Articles 1496 and 1497 of the French New Code of Civil Procedure, and corresponding provisions in other modern arbitration statutes (see supra para. 1502), as well as the order in which those provisions appear, give clear support for this interpretation. See also Fouchard, supra note 11, at 399 et seq. 2% CA Paris, Mar. 15, 1984, Soubaigne, supra note 284. On this issue, generally, see infra para. 1635. 297 French purchaser v. Dutch seller, 111 J.D.I. 926 (1984), and observations by S. Jarvin. '" See JEAN ROBERT, L' ARBITRAGE- DROJT INTERNE- DROJT INTERNATiONAL PRJVE 186 (6th ed. 1993). Comp. with Jean-Denis Bredin, l 'amiable composition et le contrat, 1984 REV. ARB. 259..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 840 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE which provides that "[i]n all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction." This would seem to imply that in legal systems which have adopted the Model Law, the powers of arbitrators ruling in equity are limited in that they must comply with the provisions of the contract, even if the arbitrators consider that to apply them would lead to an inequitable result. However, a majority of authors accept that, without going so far as to modify the contract, arbitrators ruling as amiables compositeurs can "refuse to apply rights created by the contract, or make them less severe, or even extend their effects."299 Having shown signs of leaning towards the first approach, 300 the French courts now consider that arbitrators acting as amiables compositeurs can depart from the contract. As stated by the Paris Court of Appeals in a 1988 decision in the Societe Unijet case, arbitrators ruling as amiables compositeurs "have the power to mitigate rights created by the contract, to exclude the consequences of the strict application of the terms of the contract."301 However, the courts have also held that arbitrators acting as amiables compositeurs are not at liberty to "alter the structure of the agreement"302 "by replacing the contractual obligations with new obligations which do not reflect the parties' common intention."303 Arbitral practice also tends to recognize that arbitrators acting as amiables compositeurs can choose to depart from the contract.304 We consider this latter approach to be the right one. Unlike the parties' agreement as to the choice of governing law, which is binding on the parties pursuant to the provisions of the relevant international arbitration statutes, the binding nature of the contract derives exclusively from the applicable substantive rules. As arbitrators empowered to rule in equity are entitled not to apply such rules where they consider that those rules would lead to an inequitable result, they could of course decide, on the same basis, not to apply the rule that contracts are binding. However, it has been argued that the limitation of the powers of an amiable compositeur with respect to the contract owes less to the nature of amiable composition than it does to the nature of arbitration in general: the role of the arbitrators is not to act as agents for both parties, but to resolve a dispute, and for that reason they cannot rewrite the contract. This is an attractive argument, but it too has its limits. If a rule of law 299 Loquin, supra note 284, at 208; see also LOQUIN, supra note 274, ,r,r 462 et seq.; DE BOISSESON, supra note 41, ,r 663; Mayer, supra note 207, ,r 3. "" See Cass. le civ., June 16, 1976, Krebs v. Milton Stern, 104 J.D.I. 671 (1977), and P. Fouchard's note; 1977 REV. ARB. 269, and E. Mezger's note; 1978 REV. CRIT. DIP 767; Dalloz, Jur. 310 (1978), and J. Robert's note. w, CA Paris, May 6, 1988, Un/jet, supra note 284. See also CA Paris, Mar. 12, 1985, Intrafor Cofor v. Gagnant, 1985 REV. ARB. 299, and the commentary by Loquin, supra note 284; Dalloz, IR 467 (1985), and observations by P. Julien; Cass. le civ., Apr. 28, 1987, Krebs v. Milton Stern, 1987 Bull. Civ. I, No. 128; 1991 REV. ARB. 345, and observations by J.-H. Moitry and C. Vergne; CA Paris, Apr. 19, 1991, Parfums Stern France v. CFFD, 1991 REv. ARB. 673, and observations by E. Loquin; CA Paris, Nov. 4, 1997, Taurus Films v. SARL Les Films du Jeudi, 1998 REV. ARB. 704, and observations by Y. Derains. 102 See the decisions cited supra note 302. '0' CA Paris, Apr. 19, 1991, Paifums Stern France, supra note 302. '04 See, e.g., ICC Award No. 3327 (1981), supra note 201; ICC Award No. 3344 (1981), supra note 222; ICC Award No. 4972 (1989), X & Yv. Z & Mr. W, 116 JD.I. 1100 (1989), and observations by G. Aguilar Alvarez..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 841 recognizing the doctrine of change in circumstances were to be applied on the basis that it satisfied the requirements of equity, the opposite result could be obtained: under that doctrine, the arbitrators could alter the structure of rights and obligations set forth in the contract.305 1508. - Like any other arbitrators, arbitrators acting as amiables compositeurs cannot disregard rules of international public policy, a breach of which would provide grounds for setting aside or refusing to enforce the award.306 Likewise, arbitrators ruling in equity are still obliged to comply with and ensure that the parties comply with the fundamental requirements of procedural fairness. Unless the parties agree otherwise, amiable composition concerns the substance of the dispute and not the procedure, and the amiable compositeur will remain a judge, bound to observe the fundamental principles that are required for the proper administration of justice.307 SECTION Ill LIMITS ON THE EFFECTIVENESS OF THE PARTIES' CHOICE OF LAW 1509. - In the vast majority of cases, the arbitrators comply with the choice expressed by the parties as to the law governing the merits of the dispute, and simply apply that law. In a 1971 award made in ICC Case No. 1512, the arbitral tribunal held that: the arbitrator has no power to substitute his own choice to that of the parties, as soon as there exists an expressed, clear and unambiguous choice, and no sufficient reason has been put forward to refuse effects to such a choice. 308 Jos On this point, see, in the context of French domestic arbitration, Patrice Level, L'amiable composition dans le decret du 14 mai 1980 relatif a /'arbitrage, 1980 REV. ARB. 651, especially at 656 et seq. Jo• On the requirement that arbitrators comply with international public policy even when acting as amiables compositeurs, see, for example, ICC Award No. 4265 (1984), Egyptian company v. Dutch company, 111 J.D.I. 922 (1984), and observations by Y. Derains; ICC Award No. 6503 (1990), supra note 281, at 1024; CA Paris, Mar. 12, 1985, Intra/or Cofor, supra note 302; Loquin, supra note 284, at 225 et seq. 307 On compliance with due process, see infra para. 1638. But see, for an example of an award which founded the refusal to reject memorials submitted out of time on the arbitrators' status as amiables composileurs, ICC Award No. 3327 (1981), supra note 201. On the obligation for arbitrators acting as amiables compositeurs to comply with due process, see infra para. 1638. See also, on their duty, in French domestic law, to comply with mandatory rules, CA Paris, Mar. 16, 1995, SARL Enodis v. SNC Prodim, 1996 REV. ARB. 146, and observations by Y. Derains. "" AwardNo.1512(1971),supranote244,IY.B.CoM.ARB.130(1976)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. 842 THE LAW APPLICABLE TO THE MERITS OF THE DISPUTE Even where the choice made by the parties is considered by the arbitrators to be "surprising," the arbitrators will not contest it.309 1510. - However, several theories have been put forward to allow the arbitrators to apply rules of law other than those chosen by the parties to govern the contract.310 Certain of those theories as to the limits of the effectiveness of the parties' choice are, in our opinion, unsatisfactory (§ l). Others, however, do clearly restrict the effectiveness of the parties' choice(§ 2). § 1. - Unsatisfactory Restrictions of the Effectiveness of the Parties' Choice of Governing Law 1511. - Authors have developed several theories, based on a number of different considerations, intended to allow arbitrators, in certain circumstances, to disregard the choice of governing law made by the parties. These include the theory of the incompleteness of the chosen law (A), the extensive understanding of international trade usages (B) and the theory of international mandatory rules (lois de police) (C). A. - THE THEORY OF THE INCOMPLETENESS OF THE LAW CHOSEN BY THE PARTIES 1512. - One of the earliest theories on the basis of which arbitrators considered themselves entitled to disregard the law chosen by the parties is that of the incomplete character of that law. This involves the arbitrators establishing that the law chosen by the parties does not provide an answer to the issues in dispute, and using that finding to justify resolving those issues by reference to another law or to general principles of law. The most extreme example of this approach, and one which did much to discredit arbitration in certain parts of the world, remains the 1951 award made by Lord Asquith in the Petroleum Development Ltd v. The Sheikh of Abu Dhabi case. Although the contract referred to the law of Abu Dhabi, admittedly in ambiguous terms, the distinguished arbitrator considered that the law of Abu Dhabi, which had yet to be codified, was not sufficiently sophisticated to provide a solution to the dispute. He therefore decided that he should apply not English law as such, but English law in so far as it reflected universal legal principles: "''' See, e.g., ICC Award No. 1581 (1971), quoted by Y. Derains, observations following ICC Award No. 1422 (1966), IOI J.D.I. 887 (1974). Jin On this issue, see Jean-Christophe Pommier, La resolution du con.flit de lois en matiere contractuelle en presence d'une election de droit: le role de l'arbitre, 119 J.D.I. 5 (1992)..

[Audio] Gaillard, E., & Savage, J. (Eds.). (1999). Fouchard, gaillard, goldman on international commercial arbitration. Kluwer Law International. Created from kcl on 2023-09-19 22:50:54. APPLICABLE LAW CHOSEN BY THE PARTIES 843 Albeit English municipal law is inapplicable as such, some of its rules are, in my view, so firmly grounded in reason, as to form part of this broad body of jurisprudence-this modem law of nature.311 The 1958 award made in the Aramco case also relied on the argument that the applicable law was inadequate in order to apply transnational rules. The arbitral tribunal considered that it need not apply Saudi Arabian law, which the contract specified would govern "matters within the jurisdiction of Saudi Arabia," on the grounds that: [b]ecause of this fundamental similarity [between Saudi Arabian law and the laws of Western countries on oil concession], the Tribunal will be led, in the case of gaps in the law of Saudi Arabia, of which the Concession Agreement is a part, to ascertain the applicable principles by resorting to the world-wide custom and practice in the oil business and industry; failing such custom and practice, the Tribunal will be influenced by the solutions recognized by world case-law and doctrine and by pure jurisprudence.312 This approach has not entirely disappeared from contemporary arbitration law. For example, authors with considerable experience of international arbitral practice only criticize the Petroleum Development and Aramco awards because, in their view, the respective laws of Abu Dhabi and Saudi Arabia are now sufficiently developed to provide answers to the issues which were in dispute. At no stage do those authors question the validity of the approach whereby the actual or perceived inadequacy of the law chosen by the parties is invoked to justify the application of other rules of law in resolving the dispute.313 Similarly, in a 1984 award in ICC Case No. 4145, the arbitrators interpreted a clause which referred to both the law of an Arab country and Swiss law by observing that "Swiss law constitutes a highly sophisticated system of law, which answers all the questions that may arise from the interpretation or fulfilment ofan agreement of the kind of the one entered into."314 An even clearer illustration of this trend is provided by the 1992 ICSID award made in the SPP case. The arbitral tribunal considered that even if the parties had chosen Egyptian law to govern the substance of the dispute-which was not clearly established-the arbitrators would nevertheless have been entitled to fill any gaps in that law by applying supranational rules. The tribunal applied that principle to issues as specific as the starting- point for the accrual of interest, and decided, on the basis that Egyptian law was allegedly insufficiently developed to adequately address that subject, to apply rules of public '" In the Matter of an Arbitration Between Petroleum Dev. (Trucial Coast) Ltd. and the Sheikh of Abu Dhabi, I INT'L & COMP. L.Q. 154 and 247 (1952). m Aug. 23, 1958 Award by G. Sauser-Hall, referee, and M. Hassan and S. Habachy, arbitrators, supra note 47, 27 INT'L L. REP 171 (1963); for a French translation, see I963 REV. CRJT. DIP 317. See also the references cited supra para. 1173. )I) REDFERN AND HUNTER, supra note 3, at 103. "' Supra note 64, XII Y.B. COM. ARB. IOI (1987)..