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UNVEILING THE SIGNIFICANCE OF CONFLICT RULES IN INTERNATIONAL DISPUTES
Introduction
International disputes often involve state and non-state actors from different jurisdictions with different legal systems entering into what is called a ‘Cross-border agreement’. The ideal cross-border contract is expected to contain provisions for a governing law clause (establishing the law governing the contract) and an arbitration clause (providing for the law applicable to the disputes arising therein). However, the reality is that as a matter of conflicting interests, the parties usually omit to state the applicable law, leaving it open to the determination of the prospective arbitrator(s) in the event of a dispute.
A prominent jurist[1] observed that while the host state is primarily interested in subjecting foreign investments to its national legal system to retain legislative freedom, the foreign investor is interested in excluding the application of that state’s law for fear of its sovereign legislative power to change the legal environment to his detriment. This is where the conflict of laws rules (here-in-after conflict rules) come in handy.
Conflict rules denote opposition or conflict between the applicable laws of different states or jurisdictions regarding the rights of the Parties in a case[2]. It comprises a set of objective criteria based on which issues like the applicable law to a particular may be determined. The doctrine ensures that parties have a clear framework to follow during the arbitration proceedings. Some opine that voie directe (tribunal directly determines the applicable law) is far better than conflict rules as these rules are complicated and obstruct arbitral tribunals from ruling as they deem fit. The truth is, however, different. This article shall delve into the significance of conflict rules in bringing harmony to international disputes.
Principles of Conflict Rules
Outlined below are the principles of conflict rules applicable when determining issues in international disputes:
- Party Autonomy: Arbitration is known for the freedom it accords to the parties in choosing the procedural law, substantive law, and the arbitrator(s). This gives them a sense of control and allows them to select a legal system that they believe best suits their interests. Where the Parties fail to provide the applicable law, it is up to the arbitral tribunal to determine the same. However, the tribunal must not decide based on equity (ex aequo et bono) unless expressly permitted by the parties because an arbitral tribunal is not a court of law[3], leaving recourse to either voie directe or conflict rules.
In Tamil Nadu Electricity Board v ST-CMS Electric Co. Pvt Ltd[4], the Court was tasked with determining whether an arbitration clause expressly governed by English law in a contract expressly governed by Indian law is valid and enforceable in England despite the requirement that the dispute be resolved in India. The court applied the doctrine of separability and held that the tribunal appointed in an English arbitration clause may decide matters of Indian law even if in India they would be subjected to the Central Electricity Act.
Similarly, party autonomy was upheld in the PASL Wind case[5] where the court dealt with the issue of whether domestic parties should be permitted to choose a foreign seat for arbitration by ordering that the choice of a foreign seat does not go against public policy.
- Public Policy: This principle states that the applicable foreign law must not be violative of the fundamental principles of the country sitting the arbitration. This is done to safeguard and protect important values as well as public interests.
In the case of Centrotrade Minerals & Metal Inc v. Hindustan Copper Ltd. (2017) 2 SCC 228 the arbitration clause within the contract between the concerned parties provided for a two-tier arbitration[6]. The issues for determination herein were whether a two-tier arbitration procedure is permissible in India and whether or not it would go against public policy if permitted. The Court held it permissible stating that the Arbitration and Conciliation Act 1996 did not prohibit two-tier arbitration procedures by necessary implication. It was also held not to violate public policy as the Clause did not fall within the situation where such an award would be set aside observing that parties are at liberty to choose the procedural law.
- Lex Mercatoria: This principle fundamentally recognizes and highlights the existence of customary international commercial law. They are the set rules for international trade formulated by customs[7]. Per this principle, instead of choosing one nation's law as the governing or applicable law, they are free to apply international law, customs, usages and transnational law[8].
- Harmonization: As the term implies, this principle encourages the harmonization of laws across different jurisdictions to promote consistency and predictability in international commercial arbitration.
- Proximity: This principle primarily considers geographical proximity as a jurisdictional determinant such as parties’ location, place of performance of the contract and subject matter of the dispute. It may be relevant where the parties have not explicitly chosen the governing law.
Significance of Conflict Rules[9]
- Predictability: The first significant role of conflict rules is that the application of these rules with their set objective criteria for the determination of the applicable law allows for predictability other than if everything were left to the discretion of the tribunal.
- Efficiency of Specific Proceedings: While party autonomy is crucial in arbitration, their choice of law may sometimes lead to an award that is invalid as they may disregard other relevant laws.
Take a scenario where a choice of law by a non-EU state in a contract with an EU state violates the Competition laws of the EU. One party may attribute their default to abiding by the competition laws, while the other may refer to the choice of law in the contract and disregard the applicability of the EU Competition law. An award arising from this contract would stand in violation of public policy and is liable to be set aside or unenforced. The national courts are vested to annul invalid arbitral awards[10].
To avoid disregarding the Competition laws of the EU and exceeding its powers, the arbitral tribunal may consider the Parties’ choice of law, not as an absolute principle of arbitration but, as a conflict of law, bringing it under the ambit of a particular scope such as a contract law or tort law.
With this, the award is neither invalid nor has the tribunal exceeded its powers.
- Effectiveness of Arbitration in General: Absolute party autonomy bears the risk of possible evasion of important regulatory provisions. As in the above illustration, parties seeking to evade particular laws may intentionally choose a governing law that doesn’t include such laws and if the tribunal merely follows the will of the Parties and excludes it as well, it may negatively impact the other party.
Before the landmark Mistubishi Case[11], all those disputes involving regulatory laws were non-arbitrable. This was changed and subjected to the Court’s discretion to set aside and enforce awards arising out of such situations.
Conclusion
Conflict rules are more arbitration-friendly than delocalization theory[12] as they create objective criteria that keep Party autonomy in check since, in some situations, for the award to be valid and enforceable, the promise of the Party’s choice being absolute may have to be set aside. This ensures fair, predictable and effective arbitration procedures.
In summary, the significance of conflict of laws in international arbitration derives from its clarity, fairness, predictability, and effectiveness.
References:
[1] G. Jaenicke, ‘The Consequences of a Breach of an International Agreement governed by international law, by General principles of law or by Domestic law of the Host State’ in D.C Dicke, e.d., Foreign Investment in the Present and a New International Order (1987)
[2] “Conflict of laws.” Merriam-Webster.com Legal Dictionary, Merriam-Webster, https://www.merriam-webster.com/legal/conflict%20of%20laws
[3] Army Welfare Housing Organization v. Sumangal Services (p) Ltd (2004) 9 SCC 619; see also Reliance Infrastructure Limited v State of Goa Civil Appeal No.3615 of 2023 (arising out of SLPC (c) No.8493 of 2021)
[4] (2007) EWHC 1713 (Comm)
[5] PASL Wind Solutions (p) Ltd v. GE Power Conversion (India) (p) Ltd (2021) 7 SCC 1
[6] it means arbitration in two stages. In the first stage of the dispute resolution mechanism, a sole arbitrator or arbitration tribunal is finalized by the parties to give a decision or recommend the award of the decision and in the second stage, an appellate tribunal is proposed which will approve the award given by the first stage. All you need to know about two-tier arbitration - iPleaders
[7]“Lex mercatoria.” Merriam-Webster.com Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/lex%20mercatoria
[8] European Convention on International Commercial Arbitration 1961
[9] Why Arbitration Needs Conflict of Laws Rules - Kluwer Arbitration Blog
[10] Eco Swiss China Time Ltd v Benetton International NV (1999)
[11] Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc. 473 US 614 (1985)
[12] ‘International arbitration is freed from the constraints of the lex loci arbitri to float free of national jurisdiction irrespective of where the arbitration takes place’ Delocalization of International Commercial Arbitration: Its Relevance in the New Millennium – Vol. 10 No. 2 – American Review of International Arbitration (columbia.edu)
- while the host state is primarily interested in subjecting foreign investments to its national legal system to retain legislative freedom, the foreign investor is primarily interested in excluding..
- foreign law must not be violative of the fundamental principles of the country sitting the arbitration. This is done to safeguard and protect important values as well as public interests
- Conflict rules are more arbitration-friendly than delocalization theory[12] as they create objective criteria that keep Party autonomy in check since, in some situations, for the award to be valid
