The Absence of Choice of Law Clause in Commercial Contracts: Any Solutions?   

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In a commercial contract with an arbitration clause, the parties may fail to determine any applicable law, in which case the arbitral tribunal is expected to identify the rules applicable to the merits of the dispute. The tribunal’s task in determining the applicable law is the extension of the principle of party autonomy. The tribunal hence acts as an agent of the parties and has an authority to choose the law governing the issues at stake. A modern approach suggests that localising legal issues originated from an international contract is inappropriate and that the tribunal should conduct an assessment to identify international or non-national rules or practices appropriate to the issues at hand. This approach, which grants the tribunal maximum freedom in choosing the applicable law with no reference to any choice-of-law rules, is adopted in a few institutional rules. The International Chamber of Commerce (ICC) Rules in Art 21(1) states that ‘in the absence of any such agreement [choosing the applicable law], the arbitral tribunal shall apply the rules of law which it determines to be appropriate’. This approach is also adopted in Article 35 (1) of the revised 2010 UNCITRAL Rule. To choose the appropriate law, the tribunal is obliged to provide reasons for the determination of the applicable law. The tribunal should derive the solution to the legal issues from critical and comparative law analyses considering national legal systems, arbitral case law as well as international and transnational substantive rules or standards.

It is not, however, entirely clear what criteria should be taken into account by tribunals in determining the appropriate substantive law. One suggestion is that the tribunal should examine the contractual terms and condition to identify whether they are sufficiently elaborate and clear to resolve the dispute. Another suggestion is that the tribunal should apply ‘general principles of law’, or ‘general principles of international commercial law’. Our suggestion is that rather than looking for these general principles or examining the contractual terms and condition, the tribunal should prioritise the commercial considerations and expectations contemplated by the parties at the time of contracting. The Austrian Supreme Court in Norsolor v Pablak  (1993 Rev Arb 516) and the English Court of Appeal in Tzortzis v Monark Line A/B ([1968] 1 Lloyd’s Rep. 30) confirmed that although the tribunal should be wary of lex mercatoria, the particular needs of international business should be of grave significance in granting awards. Our advice is that the tribunal can utilise an evaluative framework suitable for detecting suitable legal regimes, which are sufficiently capable of satisfying the parties’ commercial considerations. This framework consists of three criteria, which can be employed to assess any contract law doctrine applicable to the dispute at stake in order to assist the tribunals in figuring out the appropriateness of any legal regimes. The first criterion is commercial certainty, which is the most necessary quality of mercantile contracts. The second one is performance interest, which is normally referred to as the only pure contractual interest’. (D Friedmann, ‘The Performance Interest in Contract Damages’ (1995) 111 LQR 628, 632). The last one is the relational theory of contracts, which focuses on informal devices for the regulation of long-term contractual relations, by for example consensual adjustment of the primary contractual arrangements in light of changing circumstances.

 

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Reza Beheshti

Dr Beheshti holds PhD and LLM degrees from The University of Leicester and an LLB from the Shiraz State University, Iran. Before joining University of Nottingham in October 2016, he was a lecturer for a year at University of Leicester, where he taught Commercial Law, Contract Law and International Sales Transactions. He has also worked in Leicester as Part-Time Tutor teaching Contract Law during his PhD studies.

In September 2017, he was appointed as an arbitrator and is enlisted at the Arbitration Centre of Iran Chamber (ACIC). He also acts as Voluntary Correspondent for UNCITRAL, in which capacity he provides abstracts on important cases governed by UNCITRAL Texts and decided by UK and Iranian Courts for UNCITRAL legal database.

Dr Beheshti teaches Commercial Conflict of Laws at both undergraduate and postgraduate levels in Nottingham. Also, he teaches Contract Law, and International Commercial Arbitration. He gives legal advice on international commercial matters to law firms as well as multi-national companies. Dr Beheshti has sat as an arbitrator in several international trade disputes.

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