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Oxford Law Citator

Part I Fundamental Principles and the Legal Framework within which the Arbitral Tribunal Operates, Ch.3 Applicable Law, Amiable Compositeur

From: The UNCITRAL Arbitration Rules: A Commentary (2nd Edition)

David D Caron, Lee M Caplan

Previous Edition (1 ed.)

Content type:: Book content

Product:: International Commercial Arbitration [ICMA]

Series:: Oxford Commentaries on International Law

Published in print:: 07 March 2013

ISBN:: 9780199696307

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Subject(s):: Settlement of disputes — UNCITRAL Arbitration Rules — Choice of law

(p. 110) (p. 111) Chapter 3 Applicable Law, Amiable Compositeur

1. Introduction

The rules of law applied by the arbitrators to decide the substance of the dispute is the focus of Article 35 of the 2010 UNCITRAL Rules and this chapter. The applicable substantive law is distinct from the legal system regulating the arbitral proceedings, that is, the lex arbitri.¹ Article 35(1) expresses the overriding principle of party autonomy in choosing the applicable rules of law, with provision for those instances where the parties fail to designate applicable rules of law. Article 35(2) addresses the authority of the arbitral tribunal to decide as amiable compositeur or ex aequo et bono. Finally, Article 35(3) emphasizes the importance of the terms of the contract and applicable trade usages. As will be seen, Article 35 contains basic elements found in many other arbitration rules.²

(p. 112) 2. Applicable Law—Article 35

A. Text of the 2010 UNCITRAL Rule³

Article 35 of the 2010 UNCITRAL Rules provides:

1. The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate.
2. The arbitral tribunal shall decide as amiable compositeur or ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so.
3. In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract, if any, and shall take into account any usage of trade applicable to the transaction.

B. Commentary

(1 ) The primary rule—Article 35(1)

(a ) The principle of party autonomy and its application

Article 35(1), like its predecessor in the 1976 UNCITRAL Rules, “is based on the principle of party autonomy for the choice of the law applicable to the substance of a dispute that is referred to arbitration.”⁴ This principle, which has found expression in other arbitration rules,⁵ is generally accepted in international arbitral theory and practice, as well as in national laws.⁶ The Tribunal thus is directed by Article 35(1) to observe the principle of party autonomy and “shall” apply the rules of law designated by the parties.

To exercise their autonomy, the parties must “designate” the applicable substantive rules of law.⁷ Although the rules of law need not be “expressly designated” as would have (p. 113) been required in the Preliminary Draft of the 1976 Rules,⁸ the use of the word “designate” implies that there must exist a rather unambiguous choice of law. Although the arbitral tribunal could attempt to analyze the presumed intentions of the parties and derive a “tacit” designation of the applicable law; in most cases that law could, and preferably should, be determined by the tribunal under the provision applicable when the parties do not designate applicable rules of law, a topic considered below.⁹ Under the UNCITRAL Rules, a “designation” of the applicable substantive law should not be inferred merely from the selection of the place of arbitration. The selection of the place of arbitration can and often does reflect quite different considerations.¹⁰ To avoid confusion, the parties should designate the applicable rules of law in a choice of law clause included in the main contract or in the arbitration agreement.¹¹ In keeping with the principle of party autonomy, the parties may even designate the applicable law separately, for example, by conveying their agreement to the tribunal in the course of oral or written proceedings.¹²

Unless otherwise specifically indicated by the parties, a choice of law clause referring to a particular law does not include the conflict of laws rules of that law, including provisions on renvoi. The Working Group declined a suggestion to clarify that any designation of a law or legal system of a given state by the parties should be construed as referring to the substantive law of that state and not to its conflict of law rules, finding that this addition was not necessary under the Rules.¹³ Thus Article 35(1) assumes the parties intend to exclude conflict of laws rules from an otherwise general designation of an applicable law unless they expressly state otherwise. In the past, parties were advised in some situations to expressly exclude the conflict rules in the (p. 114) arbitration clause or agreement.¹⁴ Under Article 35(1), such an express exclusion is not necessary, although it must be also noted that this exclusion is not expressly stated in the text.

Similarly, parties who designate a general applicable law are presumed to have chosen that law as it evolves.¹⁵ However, “stabilization clauses” or other provisions designed to protect a private party against unilateral changes made by the sovereign have been used in investment agreements between private companies and states.¹⁶

The text of Article 35(1) and the travaux préparatoires suggest that the article certainly clarifies, and potentially expands, the scope of party autonomy in choosing the rules of law applicable to the dispute beyond that which was permitted by the text of former Article 33(1). Article 35(1) provides that the arbitral tribunal shall apply the “rules of law” designated by the parties as applicable to the substance of the dispute. The travaux préparatoires note that the term “rules of law” was preferred “essentially because of its broad scope, respecting party autonomy to elect, for example, different legal systems to govern different aspects of the relationship.”¹⁷ The Working Group noted that the term “rules of law” was consistent with Article 28 of the UNCITRAL Model Law, which provided that the parties might designate the “rules of law” applicable to the substance of the dispute.¹⁸ The term “rules of law,” prior to its inclusion in the Model Law, had only been used in the 1965 Washington Conference on the Settlement of Investment Disputes, and the arbitration laws of France and Djibouti.¹⁹ The Working Group understood the term “rules of law” to be wider than the term “law,” allowing the parties “to designate as applicable to their case rules of more than one legal system, including rules of law which have been elaborated on the international level.”²⁰

Whether the substitution of “rules of law” for the word “law” in Article 33(1) of the 1976 UNCITRAL Rules implies that the autonomy available to parties under the 1976 Rules is narrower is open to some debate. That debate, discussed below, centers particularly on whether the 1976 UNCITRAL Rules recognize the power of the parties to designate lex mercatoria as the applicable law. The term, “rules of law,” arguably implies that a sufficient degree of precision exists and that such rules are ascertainable by the parties and tribunal. This precision is an essential distinction from a tribunal decision made ex aequo et bono; a basis of decision which requires, under Article 35(2), the express authorization of the (p. 115) parties. It is this question of precision that in part drives debates concerning the designation of either lex mercatoria or “general principles.” The drafters of the 2010 Rules did not clarify whether the parties may designate the lex mercatoria to the substance of the dispute, although their discussion on the choice of applicable law where not designated by the parties clearly indicates that the 2010 Rules recognize the ability of the tribunal on its own authority to choose lex mercatoria, a provision that in our opinion supports the power of the parties to do so as well.

If the relevant domestic laws indicate that the parties’ agreement to use lex mercatoria or “general principles of commercial law” as the applicable substantive law is accepted by national courts,²¹ then an arbitral tribunal operating under the UNCITRAL Rules should respect such a choice. This is a fortiori supported by Article 35(2), which allows decisions made ex aequo et bono or by amiable compositeur when authorized by the parties and when the law applicable to the arbitral procedure permits such arbitration. As “the lex mercatoria will tie arbitrators to legal rules more than decisions made by an amiable compositeur,”²² there should be no “policy” reasons against the application of lex mercatoria on conditions similar to those expressed in Article 35(2). It is possible that the reference by the UNCITRAL Model Law and Article 35 of the 2010 UNCITRAL Rules to “such rules of law as are chosen by the parties” will increase the acceptability of lex mercatoria in various domestic arbitration laws.²³ Moreover, as discussed below, the Iran–US Claims Tribunal has applied general principles of law in many cases.²⁴

(p. 116) If the arbitrators have any hesitation about the acceptability of lex mercatoria by the parties, they should try to accommodate party autonomy by giving due consideration to the relevant domestic laws. Thus, if possible, the award should make it clear that the application of lex mercatoria does not lead to results incompatible with any domestic law that might otherwise be applicable, or that the application of a domestic law suggested by appropriate conflict rules does not contradict the lex mercatoria referred to in the arbitration clause or agreement.²⁵

In our opinion, there should be no hesitation to accept public international law as the applicable law if the parties have so agreed. Public international law fulfils the criteria of “law” within the meaning of Article 35(1), regardless of any disagreement surrounding the concept of lex mercatoria. Although public international law in relations between private enterprises is not likely to provide the most appropriate legal framework,²⁶ in relations between a state or a state entity on the one hand and a private enterprise on the other, a non-domestic law such as public international law may be the suitable applicable substantive law.²⁷ In practice, certain significant state contracts have included choice of law clauses that combine domestic law, international law and general principles of law.²⁸

The “rules of law” need not be in force. Indeed, it was exactly with the purpose of enabling a tribunal to apply, for example, a convention not yet in force that the Model Law employs the words “rules of law chosen by the parties” instead of simply referring to “law.”²⁹ As party autonomy is the overriding principle in the application of the UNCITRAL Rules, the parties’ choice of a “law” not in force should be respected to the extent possible.³⁰ Accordingly, a convention not in force, but which has been designated as applicable law, should be applied along the same principle and with similar reservations as applicable to lex mercatoria.³¹

(p. 117) Beyond limitations on party autonomy within Article 35(1) itself, there are three other sources of possible limitations.

First, and discussed in more detail in section 2(B)(3), Article 35(3) in directing the tribunal to apply the terms of the contract “in all cases” potentially limits the choice of the parties in Article 35(1).

Second, it should be recalled that under Article 1 of the UNCITRAL Rules, a provision of the legal system governing the arbitration (ie the lex arbitri) from which no derogation is possible supersedes the Rules, including Article 35. The travaux préparatoires of the 1976 Rules observe that at that time “in some jurisdictions parties may only choose as the law applicable to the substance of their dispute the law of a jurisdiction having some real connection with the transaction.”³² Issues of public policy may be present, for example, in competition and antitrust cases, in so far as they are arbitrable at all.³³

Third, it is prudent for the tribunal to be aware of the public policy of relevant jurisdictions that may bear on the enforceability of the award. It is for this reason that arbitral tribunals are sometimes urged to be cautious in their treatment of punitive damages and other penalties.³⁴ Although such cautions should be kept in mind, the tribunal should respect the clear choice of the parties. Similarly, such a cautionary note should not discourage the parties from choosing a neutral, well-developed law for fear of its rejection for lack of a sufficient connection to the subject matter of the dispute. Such fears are likely to be unfounded, as indicated by the fact that “[n]o case is known in which an arbitrator has set aside the parties’ express choice of law on the ground of lack of connection with the intended legal system.”³⁵

(p. 118) (b ) Choice of applicable law where not designated by the parties

When the parties have not designated the rules of law applicable to the substance of the dispute, the arbitral tribunal “shall apply the law which it determines to be appropriate.”³⁶ In contrast with the formulation under former Article 33(1) of the 1976 Rules, the arbitral tribunal is no longer required to “choose” the law in accordance with the “conflict of law rules which it considers applicable.” Rather, the text of Article 35(1) appears at first glance to provide the tribunal with greater flexibility to “determine” the applicable law to the substance of the dispute (although the tribunal may only determine “law,” whereas the parties may designate “rules of law” applicable to the substance of the dispute).

The travaux préparatoires reflect that the Working Group considered several different variants of the rule before arriving at the text of Article 35(1). The Working Group considered whether to use the term “law” or “rules of law.”³⁷ Opinion diverged over whether the arbitral tribunal should be given the same discretion to designate “rules of law” where the parties had failed to designate the applicable law. Comparison was made with Article 28(2) of the UNCITRAL Model Law, which referred to the arbitral tribunal applying the “law determined by the conflict of law rules which it considers applicable.”³⁸ To ensure consistency with the Model Law, it was suggested that the Rules adopt the same approach.³⁹

The Working Group also considered a proposal to replace the rule in the original text (that reference be made to conflict of laws rules failing designation by the parties) with a reference to a direct choice of the rules of law most closely connected to the dispute.⁴⁰ There was some support for a variant that referred to conflict of law rules, which could only result in the application of a national law.⁴¹ This variant placed the arbitral tribunal in the same situation as a state court having to determine which law should govern a dispute in the absence of designation by the parties, although the tribunal would have the additional obligation to choose the conflict of laws rules to be used for that determination.⁴²

There was broader support, however, for the variant that would allow the arbitral tribunal to directly choose the law most closely connected to the dispute.⁴³ It was noted that this would:

offer the opportunity to modernize the Rules by allowing the arbitral tribunal to decide directly on the applicability of such instruments as e.g., the United Nations Convention on Contracts for the International Sale of Goods, the Unidroit Principles of International Commercial Contracts, texts adopted by the International Chamber of Commerce, such as the Incoterms and the Uniform Customs and Practices for Documentary Credit, or lex mercatoria.⁴⁴

(p. 119) It was proposed, however, that the Rules should provide the arbitral tribunal with broader discretion in the determination of the applicable law by adopting wording along the lines of Article 17 of the then applicable 1998 ICC Rules.⁴⁵ The travaux préparatoires note that this option received “broad support.”⁴⁶ It was also suggested that the discretion of the arbitral tribunal should be limited by language referring to conflict of law rules or by requiring that the arbitral tribunal determine the choice of law “based on objective criteria.”⁴⁷ The Working Group noted that the broad discretion of the arbitral tribunal to determine the appropriate law was bound already by the obligation of the tribunal to render a reasoned award, and that further safeguards were unnecessary.⁴⁸

In addition, it was suggested that the provision referring to the application of “the law” could be understood as limiting the choice of the tribunal to one law only, which might impact the enforceability of the award.⁴⁹ In international arbitration, however, it was not infrequently required that more than one law had to be applied to deal with different issues arising in the dispute.⁵⁰ After discussion, the Working Group concluded that the provision was drafted in sufficiently broad terms and it was understood that the tribunal might apply different laws, depending on the issues at stake in the dispute.⁵¹

As indicated by the text of Article 35(1) and the travaux préparatoires, the Working Group ultimately chose language that modernized the Rules by granting broad discretion to the arbitral tribunal to choose the law applicable to the dispute where the parties did not designate the applicable law. Importantly, while the discretion accorded to the arbitral tribunal is less than that accorded to the parties under the principle of party autonomy, the Working Group seems to have intended to expand the discretion of the tribunal to choose and apply international law instruments, as well as lex mercatoria.

(2 )Amiable compositeur or ex aequo et bono—Article 35(2)

Article 35(1), as discussed above, assumes that the arbitrators decide on the basis of law. This general rule is confirmed by Article 35(2), which makes clear that the arbitral tribunal may assume the role of amiable compositeur or decide ex aequo et bono only under strictly defined conditions.⁵² Although both terms in Article 35(2) denote the same idea of equitable considerations,⁵³ they were retained in the provision as separate concepts on the ground that they “had different connotations in the various national legal systems.”⁵⁴

(p. 120) It is possible to decide “as amiable compositeur or ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do.” Thus the very basic condition is that the parties explicitly authorize a departure from the application of law in favor of what is regarded as reasonable or equitable in the circumstances. Such an authorization may be jointly given by the parties in the arbitration agreement, in a separate agreement, or even orally before the arbitrators (at a pre-hearing conference or a hearing).⁵⁵

The authorization by the parties, however, is not the only necessary condition for the arbitrators to award ex aequo et bono (or act as amiable compositeur). In addition, the arbitrators must make sure that “the law applicable to the arbitral procedure permits such arbitration.”⁵⁶ This quoted language is an explicit requirement in corresponding Article 33(2) of the 1976 Rules. Its deletion was suggested by the UNCITRAL Secretariat at the outset of the revision of the 1976 Rules, but not adopted by the Working Group until the 52nd Session in 2010. The proposal was made in part so as to align the rule with the approach taken in other major arbitration rules.⁵⁷ The requirement is also not necessary since such a mandatory rule of the lex arbitri would supersede the rule in any event. In most cases, this means that the law of the place of arbitration must accept decision-making on the basis of equitable or other similar considerations.⁵⁸ Many civil law and other countries recognize this kind of extra-legal arbitration, often on the same primary condition as expressed in the UNCITRAL Rules, ie, that the parties have given their express authorization thereto.⁵⁹ Jurisdictions adopting the UNCITRAL Model Law recognize the power of the arbitrators to decide ex aequo et bono or as amiable compositeur subject to the authorization of the parties.⁶⁰ Further, the line between the application of law and equity may be very thin, as equitable considerations are increasingly accepted as a part of law in various legal systems.⁶¹

The words “shall decide” in Article 35(2) indicate that, upon the fulfilment of the condition just discussed, the arbitrators are required to act as amiable compositeur or to decide (p. 121) ex aequo et bono. However, because the provision requires authorization by the parties, it seems that a better interpretation—and at the same time one in accordance with the general concept of amiable compositeur⁶²—is to regard the provision as granting an authorization rather than imposing a duty to decide ex aequo et bono. Of course, the arbitrators could apply an applicable law that they deem will lead to an equitable solution. Even where the law and equity do not fully coalesce in this way, the arbitral tribunal may have sufficient reason to give precedence to law despite the authorization to act as amiable compositeur. This is the case where the arbitrators have strong reasons to believe that, despite the fact that the law governing the arbitral procedure recognizes extra-legal arbitration, difficulties would be likely to ensue in later enforcement proceedings on the ground that the law of the likely place of enforcement rejects the notions of amiable compositeur and ex aequo et bono.⁶³ Equitable considerations also cannot be given effect where they result in contravention of clear terms of the contract in question, as discussed in the next sub-section.

(3 ) The significance of the contract and of trade usages—Article 35(3)

The significance of Article 35(3) is subtle and potentially important. First, it need be stressed that the article opens “[i]n all cases,” meaning that if the parties have (or have not) designated the rules of law applicable to the substance of the dispute or have (or have not) authorized the tribunal to decide as amiable compositeur, the arbitral tribunal also “shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.”⁶⁴ Putting aside momentarily what Article 35(3) precisely requires, the critical point at the outset is that Article 35(3) requires the tribunal to consider rules that may or may not be compatible with, for example, the rules of law designated by the parties. In essence, it could be said that in choosing the UNCITRAL Rules, the parties—in addition to, for example, making an explicit choice as to applicable rules of law—also direct the tribunal to decide in accordance with the terms of the contract. This is sometimes surprising to some: having chosen the applicable rules of law, the tribunal is nonetheless directed by Article 35(3) to decide in accordance with the terms of the contract. This twist is in part a device aimed at fulfilling party expectations by avoiding surprises in the rules of law chosen that otherwise would disturb expectations expressed in the contract.

Thus, the arbitral tribunal should first apply the terms of the contract in cases even where there is an applicable law designated in accordance with Article 35(1) and where the arbitrators have been authorized to act as amiable compositeur or ex aequo et bono.⁶⁵

The strict primacy of the contract was intentionally emphasized by a change of wording that took place in the course of the drafting of the 1976 Rules. While both the Preliminary and Revised Drafts of the 1976 Rules referred to the need to “take into account the terms (p. 122) of the contract and the usages of the trade,”⁶⁶ a more obligatory formulation (“in accordance with”) was eventually chosen to make clear the primary role of the contract.⁶⁷

In practice, most arbitration cases are decided on the basis of the terms of the contract.⁶⁸ The applicable law, ie, the law “governing” the contract, only rarely plays a role in the interpretation of such terms.⁶⁹ The applicable law, however, has relevance if the contract is defective or silent with regard to certain situations or issues (eg the rate of interest).⁷⁰ It is in such circumstances that the authorization to act as amiable compositeur or ex aequo et bono may greatly influence the decision-making, since Article 35(3) states unambiguously that contractual terms are binding on a tribunal deciding ex aequo et bono. As a part of the law, equitable considerations may be important in the interpretation of the contract, thus diminishing the distinction between equity and contract.⁷¹ The applicable law also may play a role in deciding whether a contract exists or not: “[i]t is a generally accepted principle of private international law that the formation of and the requirements as to the form of a contract are governed by that law which would be the proper law of the contract, if the contract was validly concluded.”⁷²

In addition to being bound by the contract, the arbitrators “shall take into account the usages of trade applicable to the transaction.” The drafting histories of the 1976 and 2010 Rules do not provide guidance as to what shall be regarded as a usage of the trade, although some commentators have suggested that it may be understood generally by reference to Article 1(8) of the UNIDROIT Principles of International Contracts.⁷³ As already (p. 123) indicated, Article 35(3) establishes a clear hierarchy between the contract and trade usages. The latter have only a supplementary role, for “[i]f the contract is clear, trade usages cannot justify a deviation from it.”⁷⁴

While Article 35(3) of the 2010 UNCITRAL Rules essentially follows Article 33(3) of the 1976 Rules, particularly in establishing a hierarchy between contract and trade usages, new language has been added to ensure the broader applicability of the Rules in situations where a contract was not necessarily the basis of the dispute, such as in investor–state disputes.⁷⁵ The travaux préparatoires reflect the efforts of the Working Group to accommodate situations where a contract was not necessarily the basis of the dispute, by referring to the word “any applicable” in relation to “contract” and “any” in relation to “usage of trade.”⁷⁶ Later in the drafting process, however, this language was replaced by the formulation included in Article 35(3) for purposes of increasing the clarity of the provision.⁷⁷

During the drafting of the 2010 Rule, a question was raised whether the word “contract” was broad enough to encompass all types of agreements that might form the basis of a transaction.⁷⁸ In order to broaden the scope of the provision, it was suggested that the word “contract” be replaced by the word “agreement,” since the word “agreement” was understood in some jurisdictions as including contracts as well as other agreements on which commercial transactions would usually be based.⁷⁹ This proposal was objected to on the basis that in some jurisdictions a contract was legally enforceable, which would not necessarily be the case of an agreement.⁸⁰ Moreover, it was noted that the term “contract” was used in the UNCITRAL Model Law and in the European Convention on International Commercial Arbitration of 1961.⁸¹ Accordingly, the proposal was rejected.⁸² Another proposal was made to add the words “or any legal instrument” after the word “contract” in order to reflect the language adopted by the Working Group when revising Articles 3 and 18 of the Rules.⁸³ This proposal was also rejected, on the grounds that the term “legal instruments” would be understood to include investment treaties, the application of which was not intended to be regulated under the Article.⁸⁴

(4 ) Comparison to the 1976 UNCITRAL Rules

As the topic of applicable law is central to the operation of international arbitration, it should not be surprising that the revision of Article 33 of the 1976 Rules received substantial attention. The differences in Article 33 of the 1976 Rules that are of particular significance are in Article 33(1).

(p. 124) The changes in wording of Article 35(1) of the 2010 UNCITRAL Rules from Article 33(1) of the 1976 UNCITRAL Rules reflect (1) a desire to clarify, perhaps expand, the broad capacity of the parties to designate, and tribunal to determine, the applicable law; and (2) the belief that the language should be consistent with Article 28(1) of the UNCITRAL Model Law. The choice to substitute “rules of law” for “law” in the first sentence reflected the view that the term “rules of law” is understood to be wider than the term “law,” allowing the parties “to designate as applicable to their case rules of more than one legal system, including rules of law which have been elaborated on the international level.”⁸⁵ The choice to change the first sentence to say “rules of law” and the choice to retain “law” in the second sentence both reflect the priority placed on being consistent with the UNCITRAL Model Law. The key question is whether these changes should be viewed as a departure from, or a clarification of, Article 33(1) of the 1976 UNCITRAL Rules.

Both the text and negotiating history of Article 33(1) of the 1976 UNCITRAL Rules suggest that the law designated as applicable should be a definite set of rules, typically the national law of a particular country. In our opinion, however, this limitation quite clearly was not intended to preclude the parties from designating one law to apply, for example, to the modalities and rate of interest, and another to the rest of the merits of the case (dépecage).⁸⁶

The area open to debate is whether the so-called lex mercatoria (a set of general rules and principles of commercial law transcending the confines of one particular legal system),⁸⁷ can be designated as the “law” applicable to the substance of the dispute under Article 33(1). There is no straightforward answer to this question, but in our opinion the answer is yes.⁸⁸ The principle of party autonomy strongly suggests the acceptance of such a choice.

Where the parties have failed to designate the applicable law,⁸⁹ “the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.” Thus, (p. 125) the UNCITRAL Rules proceed from the principle that the applicable substantive law should be determined by the arbitrators on the basis of a conflict-of-laws system, rather than by way of a “direct” determination of the applicable law. The same approach exists in the Model Law.⁹⁰

Although, the formulation of Article 33(1) appears to provide considerable flexibility in determining the conflict-of-laws rules, it should not be interpreted to allow the tribunal to choose the applicable conflict-of-laws system without any restraints.⁹¹ The provision was intended to permit “the arbitrators to exercise their discretion in choosing the applicable conflict of laws rules in the light of the particular circumstances of the dispute.”⁹² Thus, priority is not given to the conflict rules of the lex loci arbitri,⁹³ and it is not impermissible to apply them.⁹⁴ Unlike courts, which generally are bound to apply the conflict rules of the lex fori, “most countries will permit the arbitrator to select the choice-of-law rule which he deems applicable if a rule of the arbitration institution, or other rules adopted by the parties, such as the ICC Rules or the UNCITRAL rules of 1976, authorise him to do so.”⁹⁵

Sometimes it is preferable to refer to a conflict system, or systems, other than that of the law of the place of arbitration. This is the case where the private international law rules of the home countries of both parties point to the same applicable substantive law, while the application of the conflict of laws system of the place of arbitration would lead to another (p. 126) result. Under such circumstances the principle of foreseeability, and presumably the will of the parties, make it desirable to select the conflict-of-laws systems of the parties rather than that of the place of arbitration. The UNCITRAL Rules do not prohibit such a reference to two (or even more) conflict-of-laws systems; it is in fact a common feature in international arbitral practice. Such a practice ensures that the choice of law has been made properly under any conceivable conflict-of-laws systems that could be considered appropriate in court proceedings.⁹⁶ It is also possible that, although the various conflict-of-laws systems in question point to different national laws, the material result of the dispute would be the same regardless of which law is deemed applicable.⁹⁷ In this kind of situation, a statement by the arbitral tribunal that the selection of any law by any applicable choice of law rules leads to the same outcome would likely meet the requirements of Article 33(1).⁹⁸

The degree of flexibility in the choice of law approach prescribed in Article 33(1) also depends on the laws and judicial attitudes of the country where the arbitration takes place, as well as of the jurisdiction of the likely enforcement of the award, if foreseeable. If these are known to have a flexible attitude towards issues such as lex mercatoria, they are also likely to accept the application of “general principles of private international law” as the method for determining the applicable substantive law. As such principles refer to certain widely accepted connecting factors in the search for the “proper law” of the contract, the application of general principles may come very close to a direct determination of the applicable law.⁹⁹ If the relevant domestic laws are receptive to the concept of lex mercatoria, reference to general principles of private international law may justify the application of lex mercatoria by the arbitrators even in the absence of a party agreement to that effect.

Generally, arbitrators are well advised to proceed with caution when contemplating a departure from what may be called a “strict” conflict-of-laws approach. If any risk of a successful challenge to such a departure exists, the tribunal should apply the choice-of-law rules of a particular jurisdiction or jurisdictions. Where the law cannot be determined by way of cumulative application of the several conflict systems connected with the case, the conflict-of-laws rules of the place of arbitration can be the most neutral solution. When the place has been selected by the parties (rather than by the arbitral tribunal), the application of the conflict-of-laws rules of that jurisdiction is likely to be a better solution than using conflict norms of the seller's country which point in another direction than the private international law of the buyer.¹⁰⁰

Whenever it is difficult to determine the applicable law, the arbitral tribunal may find it appropriate to ask the parties to address the issue specifically, if they have not already (p. 127) done so.¹⁰¹ Similar party views should be taken into account as an important factor in the determination of the applicable law, although not necessarily regarded as a designation of the applicable law by the parties.¹⁰²

The chosen conflict-of-laws system determines the applicable substantive law, which is likely to be other than the procedural law controlling the arbitration (normally the law of the place). Sometimes a problem may arise as to whether a particular rule or problem—eg the quantification of damages¹⁰³—is to be classified as substantive or procedural in nature. As the classification of rules and concepts under most legal systems is considered a part of the conflict of laws, the chosen conflict-of-laws system can be utilized also for the purpose of classification. There is considerable support for the proposition that questions of evidence, including its admissibility, should be considered a procedural question regardless of the classification in the relevant domestic law.¹⁰⁴

The only change in wording in Article 35(2) of the 2010 UNCITRAL Rules from Article 33(2) of the 1976 UNCITRAL Rules is the deletion of the clause at the end of Article 33(2) which provided that a tribunal could decide as amiable compositeur or ex aequo et bono only “if the law applicable to the arbitral procedure permits such arbitration.” In practice and in the revision discussions, this deletion was not viewed as a significant change because the requirement strictly speaking is not necessary since such a mandatory rule of the lex arbitri would supersede the rule in any event. The proposal was made in part so as to align the rule with the approach taken in other major arbitration rules.

Two changes were made to Article 33(3) of the 1976 UNCITRAL Rules to clarify the provision and to ensure its broader application in cases where the contract is not necessarily the basis of the dispute, such as investor–state disputes. First, the phrase “if any” was inserted to reflect the general drafting decision in the 2010 revision to broaden applicability by providing for situations where the arbitration proceeding was based not on a contract, but rather, for example, on a bilateral investment treaty.¹⁰⁵ Second, the substitution of the word “any” for “the” prior to trade usages likewise reflected a desire “to ensure broader applicability of the Rules in situations where a contract was not necessarily the basis of the dispute.”¹⁰⁶ Despite this effort to broaden the applicability of the rule, the Working Group was cautious to prevent the language from extending to agreements other than contracts. Additionally, while the revision of the language of former Article 33(3) was intended to broaden the applicability of the rule to investor–state disputes, the rule was not intended to regulate investment treaties.

(p. 128) (5 ) A note on the Iran–US Claims Tribunal

In the 1983 Tribunal Rules of the Iran–US Claims Tribunal, Article 33 of the 1976 UNCITRAL Rules has been modified considerably. The modified text corresponds to Article V of the Claims Settlement Declaration¹⁰⁷ and grants the Tribunal wider discretion in the choice of the applicable law than is the case with the original UNCITRAL Rule. According to Article 33(1) of the 1983 Tribunal Rules, the Tribunal “shall decide all cases on the basis of respect for law, applying such choice of law rules and principles of commercial and international law as the tribunal determines to be applicable, taking into account relevant usages of the trade, contract provisions and changed circumstances.”

Article 33(1) of the 1983 Tribunal Rules and Article V of the Claims Settlement Declaration do not require the Tribunal to apply any system of conflict-of-law rules.¹⁰⁸ Indeed, they do not even strictly oblige the Tribunal to follow a contractual choice of law clause, although such rules, of course, are taken “seriously into consideration.”¹⁰⁹ Nevertheless, “the Tribunal is vested with extensive freedom in determining the applicable law in each case.”¹¹⁰ As explained in one Tribunal award, such freedom is thought to be “consistent with, and perhaps almost essential to, the scope of the tasks confronting the Tribunal, which include not only claims of a commercial nature … but also claims involving alleged expropriations or other public acts, claims between the two Governments, certain claims between banking institutions, and issues of interpretation and implementation of the Algiers Declarations.”¹¹¹

The special nature of the Tribunal and the provisions on applicable law applied by it, however, do not mean that the Tribunal's practice is without general relevance for applicable law and the interpretation of Article 35 of the UNCITRAL Rules. First, in many cases the Tribunal in practice has proceeded in the way any commercial arbitral tribunal would, applying the contract provisions¹¹² and choice-of-law clauses agreed upon by the parties.¹¹³ In doing this, the Tribunal awards have contributed to the general arbitral practice on questions concerning applicable law.

(p. 129) More importantly in the long run, however, is the portion of the Tribunal's practice in which the “novel system of determining applicable law”¹¹⁴ established by Article V of the Claims Settlement Declaration has been utilized with all the flexibility it allows. By its extensive application of general principles of law, including general principles of private international law, the Tribunal has provided much-needed clarification concerning the contents of lex mercatoria¹¹⁵ for other tribunals contemplating resort to it according to the principles discussed earlier.¹¹⁶ The Tribunal's docket, which comprises issues of a private law nature as well as claims involving state responsibility and other public international law questions, has given this arbitral body an opportunity to discuss questions such as applicable law in “state contracts.”¹¹⁷ A more extensive discussion of these developments is covered elsewhere.¹¹⁸

Despite the flexibility of the choice-of-law provision in Article V of the Claims Settlement Declaration, the rule is limited by the need to decide cases “on the basis of respect for law.” According to Article 33(2) of the 1983 Tribunal Rules, ex aequo et bono and amiable compositeur decisions are only possible upon specific authorization by the parties. In no case has such an authorization been given.

C. Extracts from the Practice of Investment Tribunals

CME Czech Republic BV and Czech Republic, Final Award (March 14, 2003) (Ad Hoc Proceeding, 1976 UNCITRAL Rules, Netherlands-Czech Republic BIT), reprinted in 15 World Trade and Arb Materials 83 (2003).

403. The basic mandate of the Treaty obligates the Tribunal to “decide on the basis of law”, which is a self-explanatory confirmation of the basic principle of law to be applied in international arbitration according to which the arbitral tribunal is not allowed to decide ex aequo et bono without authorization by the parties (see Art. 33 (2) [1976] UNCITRAL Arbitration Rules and Art. 17 (3) ICC Arbitration Rules).

Methanex Corp and United States of America, Award (August 3, 2005) (ICSID administered, 1976 UNCITRAL Rules, NAFTA Chapter Eleven), Part II, Chapter B, at 4–5:

7. Pursuant to Article 1120(1) NAFTA, Methanex submitted its claim to arbitration under the [1976] UNCITRAL Arbitration Rules (the “UNCITRAL Rules”)⁸. It follows from Article 1120(2) NAFTA that the [1976] UNCITRAL Rules govern the procedure of the arbitration (except to the extent modified by Section B of Chapter 11)⁹.
8. By Article 33(1) of the [1976] UNCITRAL Rules, the Tribunal is required to apply the law designated by the parties as applicable to the substance of the dispute, namely NAFTA itself (including Article 1131) and applicable rules of international law.
(p. 130) 9. To a limited extent, where the [1976] UNCITRAL Rules make no provision and the Disputing Parties have not agreed otherwise, the procedure of the arbitration may also be governed by the lex loci arbitri and any laws or rules of law thereby designated. This is an issue to which the Tribunal returns in part below in Chapter III of this Award with regard to the USA's Application to Exclude Certain of Methanex's Evidence.

[Footnote]8. … Article 1120(1) NAFTA provides: “Except as provided in Annex 1120.1, and provided that six months have elapsed since the events giving rise to a claim, a disputing investor may submit the claim to arbitration under: … (c) the [1976] UNCITRAL Arbitration Rules.”

[Footnote] 9. Article 1120(2) NAFTA provides: “The applicable arbitration rules shall govern the arbitration except to the extent modified by this Section.”

Zeevi Holdings and Bulgaria and The Privatization Agency of Bulgaria, Final Award, (October 25, 2006) (Ad Hoc Proceeding, 1976 UNCITRAL Rules, Privatization Agreement):

104. Pursuant to para. 15.1 of the PA the Parties have agreed to settle any claim or dispute arising out of or in relation to this contract by arbitration to be conducted under the Rules of Arbitration of the United Nations Commission on International Trade (UNCITRAL Rules). Regarding the substantive law to be applied by the tribunal, Article 33 UNCITRAL Rules provides:

“Article 33
1. The arbitral tribunal shall apply the law designated by the parties as applicable to the substance of the dispute.”
105. In Section 14.1 of the PA the Parties have agreed that the PA “shall be governed by and construed in accordance with the laws Bulgaria.” Therefore, concerning the merits of the case the law of the Republic of Bulgaria will be applied.
106. Since it has not been contested by the Parties that under the law of the Republic of Bulgaria, generally and subject to mandatory provisions of the law, the terms of the parties’ contract have the force of law between them, and the parties must comply with what is expressly stated in the contract the PA is the primary legal source for the Tribunal's findings.
107. Additionally, Bulgarian Law may be applied where the PA lacks an agreement on certain issues.
108. Furthermore, pursuant to Article 33 (3) [1976] UNCITRAL Rules “usages of trade applicable to the transaction” might be pertinent, although they are cautiously applied.

Oostergetel and Laurentius and Slovak Republic, Final Award (April 23, 2012) (Ad Hoc Proceeding, 1976 UNCITRAL Rules, Netherlands-Czech Republic BIT):

141. As regards the method for establishing the content of the governing law, the Tribunal observes that the BIT and the [1976] UNCITRAL Arbitration Rules are silent on this issue. By contrast, under Swiss international arbitration law which governs these proceedings, the principle of iura novit iuria—or better iura novit arbiter—does apply to an arbitral tribunal.¹⁰ Thus, the arbitral tribunal is under an obligation to apply the law ex officio without being bound by the arguments and sources invoked by the Parties. However, the Tribunal should not base its decision on a legal theory which was not part of the debate and which the parties could not expect to be relevant.

¹⁰ Swiss Supreme Court decision of 19 December 2001, P. 114/2001, section 3.a, ASA Bulletin 2002 p. 493; see also G. Kaufmann-Kohler, “The Governing Law: Fact or Law?—A Transnational Rule on Establishing its Content,” in Best Practices in International Arbitration. ASA Special Series No 26, at 79 (M. Wirth, Ed. 2006).

(p. 131) D. Extracts from the practice of the Iran–US Claims Tribunal

(1 ) Tribunal Rules (1983), Article 33(1)

Rexnord Inc and Islamic Republic of Iran, Award No 21–132–3 (January 10, 1983) at 13, reprinted in 2 Iran–US CTR 6, 12 (1983-I):

c. Interest

The law applicable to the agreements is that of the United Kingdom. Under English law, where a bill is dishonored by non-payment, interest on the principal debt is awarded at a rate reflecting the rates which would have been incurred had the prevailing party borrowed the amount at the time it fell due. The date from which the interest is to be calculated is the time of the maturity of the bill except in cases where the bill is payable on demand.

Haus Intl, Inc and Islamic Republic of Iran, Case No 174, Chamber One, Order of January 17, 1984:

The Claimant is ordered to file with the Tribunal by 5 April 1984 a Memorial addressing the following questions:

1. What law determines the relationship between Haus International, Inc. (“Haus”) and Meaplan A.G. (“Meaplan”) created by (“the Architect's Agreement,”) dated December 5, 1977, signed by Haus and Meaplan, on the one hand, and Tehran Development Corporation on the other, and (ii) the “Joint Venture Agreement,” dated December 10, 1977, between Haus and Meaplan, both of those agreements read together? Under that law, did those agreements create a partnership or other form of association?
2. If a partnership or other form of association was created under the applicable law, has Haus by itself the right under that law, or under international law, to assert a claim before the Tribunal for damages allegedly sustained by the partnership or association?

American Bell Intl Inc and Islamic Republic of Iran, Award No ITL 41–48–3 (June 11, 1984), Concurring and Dissenting Opinion of Richard Mosk on Preliminary Legal Issues, at 6 (June 11, 1984), reprinted in 6 Iran-US CTR 95, 97–98 (1984-II) (footnote omitted):

That a limitation of amount of liability clause is valid is supported by whatever law is applicable. Article 10 of the contracts provides that the contracts are subject to the Laws of the Imperial Government of Iran and the United States in every respect, but however the governing law of [the contracts] is the law of Iran. It has been said that “the parties” freedom to choose the law which governs their contract seems to be so widely accepted that it must be said to be a “general principle of law recognized by civilized nations.” O Lando, Contracts, Ch. 24, in III International Encyclopedia of Comparative Law 33 (1976). It might be that by virtue of Article V of the Claims Settlement Declaration, which gives the Tribunal the power to apply “such choice of law rules and principles of commercial and international law as the Tribunal determines to be applicable, taking into account relevant usages of the trade, contract provisions and changed circumstances,” the Tribunal can apply law other than that designated by the parties to the contract. The tribunal has not provided much guidance as to the applicable law. As a practical matter, in many cases the choice of whether to utilize public international law, general principles of law, municipal law (past or present) or some other law will not affect the result. As to the applicable law, see Oil Field of Texas, Inc. and Iran, ITL 10–43-FT (9 Dec 1982), (Concurring Opinion of Richard M Mosk (10 Dec 1982)); Settlement of Disputes, in I Encyclopedia of Public International Law 130, 144, 147 (1981); A Feller, The Mexican Claims Commissions 223 (1935).

(p. 132) Economy Forms Corp and Islamic Republic of Iran, Award No 55–165–1 (June 14, 1983) at 11–12, reprinted in 3 Iran–US CTR 42, 47–48 (1983-II):

1. Applicable law

It is a generally accepted principle of private international law that the formation of and the requirements as to the form of a contract are governed by that law which would be the proper law of the contract, if the contract was validly concluded. See 2 Dicey & Morris, The Conflict of Laws Rule 146 at 775 and Rule 148 at 784 (10th ed. 1980), O. Lando, “Contracts,” in III International Encyclopedia of Comparative LawChapter 24 at 102–103.

The goods were to be manufactured in Iowa by Economy Forms and delivery and payment had also to be made in the United States. In view of these circumstances the Tribunal holds that United States law governs the contract, since the centre of gravity of these business dealings was in the United States; that being the test under general principles of conflicts of law. Consequently, the law applicable to the contract, including its formation, is the Uniform Commercial Code, enacted e.g. as Iowa Code §§ 554.1101–09 by the Iowa legislature, 1965, (61 G.A.) c. 413 (effective 4 July 1966; hereinafter “UCC”).

Harnischfeger Corp and Ministry of Roads and Transportation, Partial Award No 144–180–3 (July 13, 1984) at 15–16, reprinted in 7 Iran–US CTR 90, 99 (1984-III) (footnote omitted):

The agreement between MSA and Harnco makes no reference to governing law; however, under general choice of law principles, the law of the United States, the jurisdiction with the most significant connection with the transaction and the parties, must be taken to govern in this specific case. Not only was the agreement accepted in the United States by Harnco, a Delaware Corporation, but the component parts were manufactured in the United States, and Harnco completed its performance by delivering the equipment FOB its Iowa plant. See Economy Forms Corporation and The Government of the Islamic Republic of Iran, et al., Award No 55–165–1 (14 June 1983).

The United States law applicable to this commercial transaction is the Uniform Commercial Code (“UCC”) which, with minor variations, has been adopted by 49 of the 50 states, including each of the United States jurisdictions with contacts with this transaction.

DIC of Delaware, Inc and Tehran Redevelopment Corp, Award No 176–255–3 (April 26, 1985) at 22–24, reprinted in 8 Iran–US CTR 144, 160–162 (1985-I):

The only issue of the existence and enforceability of a contract relates to the alleged Phase III Contract. TRC contends that it did not enter into a contract for Phase III with the Contractors; that the unsigned, draft Phase III contract submitted by the Claimants was of no effect; that the matter never progressed beyond the stage of oral negotiations; and that no work was performed or payments made under any such alleged contract.

…

If there were an oral agreement, it would be enforceable under Iranian law, which would seem to be the law of the contract because of the connection between the project and Iran and because of the fact that Iranian law was chosen to be the applicable law in the contracts for the other phases. See Economy Forms Corporation and Iran, Award No 55–165–1 (14 June 1983).

Under Iranian law, a contract not in writing and involving an amount exceeding over 500 rials in value cannot be proved by oral or written testimony alone. See The Civil Code of Iran, Arts. 1306 and 1310. In the present case the Claimants rely on contemporaneous documents recording the understandings reached with IRC, and demonstrating part performance of the contract. It appears that acceptance of part performance can be proof of a binding contract under Iranian law. See, e.g. The Civil Code of Iran, Art. 193. Moreover, although the governing law of the contract itself must be taken to be that of Iran, each forum applies its own procedural and evidentiary rules to the disputes before it, and it is arguable that the type of evidence admissible to establish a contract is a (p. 133) procedural or evidentiary matter. Under Article V of the Claims Settlement Declaration the Tribunal must look to “principles of commercial and international law” for guidance. It is widely accepted by municipal systems of law that one can prove the existence of an enforceable oral contract through evidence demonstrating part performance. See, e.g. II K. Zweigert & H. Kötz, An Introduction to Comparative Law: The Institutions of Private Law 40–41, 48–50 (1977). Such a principle must be taken to constitute a general principle of law. Moreover, it could be argued that, by its conduct, TRC is estopped to assert the non-existence of the contract.

…

Accordingly, if there were an agreement, there is not sufficient evidence of its definiteness of terms to be enforceable. Nevertheless, the Contractors performed work at the request of and with the knowledge of TRC and should be compensated therefore. It is well established under Iranian law and general principles of law that under the doctrine of quantum meruit there may be a recovery for work performed. See The Civil Code of Iran, Arts. 301–06, 336; 3 M. Whiteman, Damages in International Law 1732–61 (1943); 12 Williston on Contracts §§ 1452–1459A at 68–108 (3d ed. 1970); Benjamin R. Isaiah and Bank Mellat, Award No 35–219–2 (30 Mar. 1983).

Carolina Brass, Inc and Arya Shipping Lines, Award No 252–10035–2 (September 12, 1986), reprinted in 12 Iran–US CTR 139, 144–145 (1986-III):

20. The Tribunal notes that the Islamic Republic of Iran, the United States, and India, being the Countries connected with the formation and execution of the Bills of Lading, have all adopted the Hague Rules in their domestic legislation, thus embodying the one year limitation of time in their national laws. The Tribunal also notes that the Hague Rules are widely accepted as the standard regime for bills of lading in international maritime trade. The Netherlands also, whose law the Claimant argues is applicable due to the seat of this Tribunal in The Hague, has adopted the Hague Rules and embodied the one year time limitation in its domestic legislation.
21. The Tribunal need not decide whether the law of the Islamic Republic of Iran, the United States, India, or the Netherlands should apply to this particular Case in order to establish that the time limitation contained in Article 3 (6) of the Hague Rules and in Paragraph 21 of the Bills of Lading is applicable in this Case, since the law in each of these countries is similar, and all are in conformity with the widespread practice reflected in the Hague Rules.

Sedco, Inc and National Iranian Oil Co, Award No 309–129–3 (July 7, 1987), reprinted in 15 Iran–US CTR 23, 29 (1987-II):

a ) The Applicable Law
1. 17. The Tribunal has held in this Case that in the event of an expropriation implicating the rules of public international law the Treaty of Amity, Economic Relations, and Consular Rights between the United States of America and Iran, signed 15 August 1955, entered into force 16 June 1957, 284 U.N.T.S. 94, T.I.A.S. No 3853, 8 U.S.T. 899 (“Treaty of Amity”), “is applicable to the issue of compensation due Claimant …”. March Interlocutory Award, p. 7. Further, the Tribunal has stated that “the Treaty of Amity on the particular issue of what constitutes a taking incorporates the rules of customary international law …”. October Interlocutory Award, p. 34. To the extent the taking here alleged is seen as a non-governmental appropriation, general principles of commercial law then become controlling.

Amoco Intl Finance Corp and Islamic Republic of Iran, Award No 310–56–3 (July 14, 1987), reprinted in 15 Iran–US CTR 189, 236–41 (1987-II):

b ) The Law of the Contract
1. 154. In the present context the issue of the applicable law is quite different from the question of the law applicable to expropriation. It relates to the problem known in conflicts of laws, or private international law, as “the law of the contract,” namely the law governing the validity, interpretation and implementation of the Khemco Agreement. Although such a distinction (p. 134) is rather simple, the discussion of the two issues by the Parties was not always pursued without some confusion.
2. 155. The choice of the parties relating to the law of the Khemco Agreement appears in Article 30, headed “Applicable Laws,” which reads as follows:
  1. 1. This Agreement shall be construed and interpreted in accordance with the plain meaning of its terms, but subject thereto, shall be governed and construed in accordance with the laws of Iran.
  2. 2. The provisions of any current laws and regulations which may be wholly or partly inconsistent with the provisions of this Agreement shall, to the extent of any such inconsistency, be of no effect in respect of the provisions of this Agreement.
3. 156. Construed according to the ordinary meaning of the terms, Article 30, paragraph 1 provides that an interpretation of the Khemco Agreement must be based first on the terms thereof. This is, of course, the normal way of interpreting a contract. If problems arise which cannot be solved in this way, the interpreter will have to look at the laws of Iran, which is also the usual way of applying the law of the contract in practice. On the basis of this reading, the Tribunal cannot accept that Iranian law plays only a subordinate role, as contended by the claimant. Nor is the Tribunal convinced that the Khemco Agreement should be characterized as an agreement governed, by nature, by international law. Such a Construction is manifestly contrary to the plain meaning of the terms of Article 30, paragraph 1. It is clear that the parties chose Iranian law as the law of the contract and no reason appears for reading the provisions otherwise.
4. 157. Paragraph 2 of Article 30 does not change this conclusion; it only qualifies it. The purpose of this paragraph was not to submit the Khemco Agreement to law other than Iranian law, but only to solve any question which may arise in case of inconsistency between the “current laws and regulations” of Iran and the terms of the Khemco Agreement itself. In such a case the terms of the Khemco Agreement would nevertheless be considered as valid and binding on the parties. Thus, the contractual regime established by the Khemco Agreement may constitute an exception to the legal regime otherwise existing in Iran.
5. 158. The Khemco Agreement was thus of a specific nature, since its provisions could be contrary to Iranian law without losing their binding force on the parties. In fact, a series of clauses of the Khemco Agreement determine how a number of public laws of Iran would apply to the parties in the implementation of the Khemco Agreement (see, inter alia, Articles 9, 10, 14, 15, 16, 17 and 18). For this reason, the provisions of Article 2 required NPC to submit the Khemco Agreement for approval and ratification by the High Council for Petroleum Industries, NIOC, the Council of Ministers and the Joint Economic and Financial Committees of the Majlis.
6. 159. Nothing in Article 30, paragraph 2 or Article 2 militates against the choice of Iranian law as the law of the contract made in Article 30, paragraph 1. Article 2 only provides for the approval by the competent Iranian authorities necessary to authorize those articles of the Khemco Agreement which establish a special regime within the framework of Iranian law. Article 30, paragraph 2, clearly intended that articles which are not inconsistent with Iranian law, as it existed at the time of execution of the Khemco Agreement, are subject to it as provided in Article 30, paragraph 1.
7. 160. The law of the contract applies only to the interpretation and implementation of the Khemco Agreement (and possibly to its validity) as between the parties. Therefore, while it certainly applies to NPC and Amoco, as well as to Khemco, it does not apply to NPC, which was not a party to the Khemco Agreement. The issue then arises as to whether the law of the contract applies to the other Respondent, namely Iran.
8. 161. It cannot easily be found that Iran became a party to the Khemco Agreement through approval and ratification thereof pursuant to Article 2. The Preamble clearly identifies the parties between which the Khemco Agreement is concluded as NPC and Amoco, and makes reference, several times, to them as “both parties.” While NPC is controlled by Iran and was established pursuant to a State law, it has a legal personality distinct from that of the State and NPC contracted only for itself.
9. (p. 135) 162. It can be admitted that, in certain circumstances, the separate personality of an entity fully controlled by a State can be discarded and the State considered as bound by the terms of a contract entered into by such an entity. See K.H. Böckstiegel, Arbitration and State Enterprises 34–48 (1984); K. H. Böckstiegel, “The Legal Rules Applicable in International Commercial Arbitration involving States or State-Controlled Enterprises,” in International Chamber of Commerce, 60 Years On—A look at the Future 117, 130–46 (1984). Such a conclusion, however, can legitimately be drawn only if this entity acted as an instrument of the State. The Tribunal is not satisfied that such was the case in the present instance. It is true that the development of petrochemical industries was considered by the Iranian Government as an important goal of the development policy of the country, and was promoted by the enactment in 1965 of an Act authorizing NPC to enter into joint ventures with foreign companies to this effect, and providing for tax exemptions and other privileges beneficial to such joint ventures. Such legislation, however, clearly shows that the State had no intention itself to engage in such industrial and commercial endeavors and left NPC to take the financial and commercial risks associated with them. In approving and ratifying the Khemco Agreement, the Iranian authorities only acted pursuant to Article 1 of the Act concerning Development of Petrochemical Industries of 15 July 1965 (“the Act of 15 July 1965”), in order to permit Khemco to enjoy the statutory exceptions and privileges defined by Article 3 thereof. This approval and ratification were the conditions of application of the Act of 15 July 1965 to the Khemco Agreement but, for the reasons just set forth, cannot be considered binding Iran as a party to the Khemco Agreement.
c ) The “Stabilization” Clauses
1. 165. The Claimant alleges that the conduct of Iran in terminating the Khemco Agreement violated two articles thereof which the Claimant characterizes as “stabilization” clauses, namely Article 21, paragraph 2 and Article 30, paragraph 2. These clauses are actually quite different in nature, as revealed by the heading of the respective articles. Article 21 is headed “Guarantee of Performance and Continuity” and Article 30 “Applicable Laws.”
2. 166. Article 30, paragraph 2, as discussed above, had the effect of affirming the validity of contractual clauses inconsistent with Iranian laws and regulations. This cannot be considered as a stabilization clause in the usual meaning of the term, however, since that term normally refers to contract language “which freeze the provisions of a national system of law chosen as the law of the contract as of the date of the contract, in order to prevent the application to the contract of any future alterations of this system. Article 30, paragraph 2 applied only to the provisions of any current laws and regulations, clearly referring solely to the laws and regulations existing at the time of execution of the Khemco Agreement. Therefore it provided no guarantee for the future and is not a stabilization clause.
3. 167. Article 30, paragraph 2, furthermore, must be read in conjunction with Article 2, which, as already noted, referred to the grant of facilities and privileges conferred by the Government under the two Acts, but with the proviso that “any future amendments to such Acts” would also apply. This is the contrary of a stabilization clause.
4. 168. Article 21, paragraph 2 is of a quite different nature. It does not relate to applicable law but to performance of the Khemco Agreement. It reads as follows:
  
  Measures of any nature to annul, amend or modify the provisions of this Agreement shall only be made possible by the mutual consent of NPC and AMOCO.
  
  …
5. 173. In conclusion, the Tribunal does not find that the Khemco Agreement contains any “stabilization” clauses binding on the government. The clauses referred to by the Claimant bind only the parties to the Khemco Agreement, namely NPC and Amoco. According to its own terms, Article 30, paragraph 2 cannot be construed as a stabilization clause and Article 21, paragraph 2 only prohibits unilateral measures by NPC or Amoco to “annul, amend or modify” the provisions of the Khemco Agreement.

(p. 136) Mobil Oil Iran, Inc, et al and Islamic Republic of Iran Award No 311–74/76/81/150–3 (July 14, 1987), reprinted in 16 Iran–US CTR 3, 20–28 (1987-III):

1. Applicable Law
a )The Claimants’ Contentions
1. 59. The first issue raised by the Claimants in relation to applicable law concerns the law of the contract. This question is dealt with in Article 29 of the Agreement, which reads as follows:
  
  This Agreement shall be interpreted in accordance with the laws of Iran. The rights and obligations of the Parties shall be governed by and according to the provisions of this Agreement. The termination before expiry date or any alteration of this Agreement shall be subject to the mutual agreement of the Parties.
2. 60. According to the Claimants, “Article 29 thus identifies only one source of mandatory rules that will govern the parties’ rights and obligations—the Agreement itself. By this provision, the parties plainly intended to exclude any law that would alter or terminate the Agreement by any means other than mutual consent. The Claimants further note that the parties drew a sharp line between the rules that would be used to interpret the Agreement and those that would govern the parties’ rights and obligations.” In support of this contention, the Claimants refer to the initial negotiation of the Agreement and conclude that “Article 29 does not say what systems of law may be used to determine the Agreement's validity or to enforce its implementation.”
3. 61. In view of the limited scope which they accord to Article 29, the Claimants state that the Tribunal must look elsewhere to determine the law governing the implementation of the Agreement. They therefore suggest that “both the nature of the Agreement and its provisions demonstrate that the Agreement and claims arising thereunder are governed by international law, including general principles of law.” In support of this position, the Claimants essentially rely on four factors: (1) the Agreement was a long-term contract; (2) it was concluded between a State or a State agency and a private foreign company; (3) its purpose was to assist in developing an important national resource through complex arrangements; and (4) it contained a clause requiring international arbitration of all disputes arising out of its interpretation and performance. According to the Claimants, these elements define the SPA as an “internationalized contract” which, as is generally recognized by arbitral tribunals and scholars, is governed by international law, including general principles of law.
4. 65. Finally, the Claimants assert that the repudiation of the SPA also was expropriation of the Companies’ property interests. This uncompensated expropriation allegedly violated both customary international law and Iran's treaty obligations. More specifically, the Claimants argue that it was contrary to Article IV, paragraph 2, of the 1955 Treaty of Amity, Economic Relations and Consular Rights (“Treaty”) between the United States of America and Iran, signed 15 August 1955, entered into force 16 June 1957, 284 U.N.T.S. 92, T.I.A.S. No 3853, 8 U.S.T. 900.
b )The Respondents’ Contentions
1. 66. To some extent, the Respondents arrive at similar conclusions as to the law applicable to the issue of liability. They assert that the claims may succeed only if “the facts invoked by the Claimants give rise to the responsibility in international law of the Government of Iran.” This is because the Tribunal is a truly international tribunal, which, as such, is concerned with the rights and duties of States in public international law. In the case before it, therefore, “the responsibility engaged is that of the Respondent State for a breach of public international law.”
2. 67. In the present Cases, the Respondents contend that a breach of contract can be established only by reference to the proper law of the SPA, which undoubtedly is Iranian law, as clearly stated in Article 29 of the Agreement. According to the Respondents, this conclusion conforms to Article 968 of the Iranian Civil Code, which provides that the law of the contract is the law of the place where the contract was concluded, except if the parties have explicitly or impliedly declared the transaction to be subject to the law of another country (and if those parties are all foreign nationals). The Respondents further note that Iranian law also is specified in the Iranian petroleum legislation of 1957 as the law applicable to contracts concluded by NIOC. Similarly, they point out that a presumption exists in international law that the law applicable to a contract to which a State is a party is the domestic law of that State.
(p. 137) c )The Tribunal's Findings
1. 72. Initially, the Tribunal notes that, when dealing with an issue of applicable law, it first must comply with the relevant provisions of the Algiers Accords, found in Article V of the CSD. Article V reads as follows: The Tribunal shall decide all cases on the basis of respect for law, applying such choice of law rules and principles of commercial and international law as the Tribunal determines to be applicable, taking into account relevant usages of the trade, contract provisions and changed circumstances.
  
  Accordingly, in determining the choice of law in a given case, the Tribunal should examine relevant legal principles and rules as well as the specific factual and legal circumstances of the case, giving special regard to relevant usages of the trade, contract provisions and changed circumstances.
2. 73. In these cases, the Tribunal concludes, and the Parties agree, that the lawfulness of an expropriation must be judged by reference to international law. This holds true even when the expropriation is of contractual rights. A concession, for instance, may be the object of a nationalization regardless of the law the parties chose as the law of the contract. In the instant Cases, the validity under international law of the Single Article Act and of its application to the SPA or any other agreement is not dependent upon the law which the Parties chose to govern the Agreement.
3. 74. In this regard, the Tribunal finds that the Treaty sets forth the governing obligations of the Parties as to the expropriation.
  
  …
4. 75. The claim for alleged breach and repudiation of the Agreement, however, raises quite different issues. At the outset, the Tribunal notes that, when determining the alleged liability of Iran or the United States, the Tribunal must act pursuant to the principles and rules of international law, as it is empowered to do by Article V of the CSD. However, when a claim is based on an alleged breach of contract, the Tribunal first must determine whether the alleged breach actually took place. Obviously, such a determination is made by reference to the terms of the relevant contract, but it also may depend upon legal issues to which the provisions of the contract do not provide a solution. Whether certain conduct of a party constitutes a repudiation of the contract or whether certain dealings of the parties constitute an agreement altering the initial contract are examples of such issues. In questions of this kind, it becomes necessary to rely upon the law applicable to the contract. This is also the case when the Tribunal must decide upon the alleged liability of an entity other than Iran or the United States, when the entity is not a subject of international law.
5. 76. The only provisions of the SPA concerning the applicable law are those contained in Article 29, quoted above in paragraph 59. As the dispute between the Parties over the interpretation of Article 29 demonstrates, these provisions are remarkably—and perhaps intentionally—ambiguous.
6. 77. The sentence providing that “[t]he rights and obligations of the Parties shall be governed by and according to the provisions of this Agreement” states only the obvious. It is nothing more than reaffirmation of the basic rule of contract law that a contract is the law of the parties. It therefore does not impose any specific system of law. Nor can it be construed as meaning that the contract is self-sufficient and is not governed by a system of law. Apart from the fact that some of the issues cannot be resolved by reference to the terms of the Agreement alone, it is sufficient to note that such a radical conclusion cannot be drawn from an article which specifically refers to a domestic system of law, even if it is only for the interpretation of the Agreement. Indeed, the first sentence of Article 29 states that the SPA “shall be interpreted in accordance with the laws of Iran.” This is a clear recognition by the parties that the Agreement alone could not provide a solution for all the difficulties which might occur in relation to its performance.
7. 78. It is noteworthy that the usual choice of law clause, which can be found in many international contracts and refers to the interpretation and implementation of the contract, was studiously avoided, and that reference is made to Iranian law solely for interpretation of the Agreement. The emphasis put on Iranian law as applicable to interpretation is, at first glance, surprising, (p. 138) since the rules of interpretation of contracts set forth in Article 224 and 225 of the Iranian Civil Code and the general rules of interpretation set forth in Article 3 of the Civil Procedure Code are rather terse and do not differ from the rules generally applied in most systems of law, including international law. The provision, however, draws some importance from the fact that the Agreement relies on specific Iranian laws, notably tax law and law applicable to the ownership of hydrocarbon reserves.
8. 79. Read in its entirety, Article 29 appears to have had as its main objective to ensure that the Agreement would not be unilaterally amended, but, as expressly stated in the last sentence, be terminated before the expiry date or altered only by “the mutual agreement of the Parties.” In light of this objective, the second sentence becomes legally meaningful. Such language is particularly significant in a contract such as the SPA, which relates to the oil industry, where it has often been held that the contracts executed between a State or a State agency and a foreign company may be unilaterally altered by the former. This was especially relevant at the time of negotiation of the Agreement, when important changes in contractual relationship between the Persian Gulf Countries and foreign companies were introduced by unilateral measures decided by the governments of the former. Even in relations between Iran and the Consortium, the negotiation of the SPA was prompted by a decision by Iran not to permit the 1954 Consortium Agreement to be extended beyond 1979, in spite of a clause in that agreement reserving to the Consortium the right to such an extension.
9. 80. In sum, Article 29 is only partially and secondarily concerned with a choice of law. The fact that this choice only applied to the issue of interpretation, in contrast with the usual practice, does not justify an extension of this choice to other issues. Expressio unius exclusio alterlus est. The only possible interpretation is that the parties were unable to arrive at an agreement beyond the question of interpretation and that no choice of law was made in the Agreement in relation to the law applicable to any other issue.
10. 81. In the absence of contract provisions, the Tribunal must decide what choice of law is applicable by taking into consideration all circumstances that it deems relevant. In view of the international character of the SPA, concluded between a State, a State agency and a number of major foreign companies, of the magnitude of the interests involved, of the complex set of rights and obligations which it established, and of the link created between this Agreement and the sharing of oil industry benefits throughout the Persian Gulf Countries, the Tribunal does not consider it appropriate that such an Agreement be governed by the law of one Party. This conclusion is in accord with the spirit of Article 29 and with the usages of trade, as expressed in agreements between States and foreign companies, notably in the oil industry, and confirmed in several recent arbitral awards. See Libyan American Oil Company (LIAMCO) and Government of the Libyan Arab Republic (Mahmassani arb., Award of 12 Apr. 1977), reprinted in 62 I.L.R. 139 (1982), Kuwait and American Independent Oil Company (AMINOIL) (Reuter, Sultan & Fizmaurice arbs., Award of 24 Mar. 1982), reprinted in 21 International Legal Materials 976 (1982); Texaco Overseas Petroleum Company v. Government of the Libyan Arab Republic (“TOPCO”), (Dupuy arb., Award of 19 Jan. 1977), reprinted in 53 I.L.R. 389 (1979). Accordingly, the Tribunal determines that the law applicable to the Agreement is Iranian law for interpretative issues, and the general principles of commercial and international law for all other issues. For reasons previously set forth, the law applicable to the liability of Iran, as well as of NIOC, which acted as an instrumentality of the Iranian Government in these Cases, is international law.

United Painting Co, Inc, a claim of less than US $250,000 presented by the United States of America and Islamic Republic of Iran, Award No 458–11286–3 (December 20, 1989), reprinted in 23 Iran-US CTR 351, 356–57 (1989-III):

1. 22. In Housing and Urban Services International, Inc. and The Government of the Islamic Republic of Iran, et al., Award No 201–174–1, p. 22 (22 Nov 1985), reprinted in 9 Iran-U.S. C.T.R. 313, 329 (“Haus”), the Tribunal addressed this question under Iranian law. It concluded that there is substantial authority for the proposition that where there is a civil partnership, a claim (p. 139) must be pursued in the names of all the partners as its joint owners. The Tribunal therefore held that under the laws of Iran the Claimant might not have standing to sue. At the same time, the Tribunal noted that due to its international position, while municipal law may serve as its “point of departure,” the Tribunal must also look to international law. See id. at 23–24, reprinted in 9 Iran-U.S. C.T.R. 330.
2. 23. Article 20 of the Joint Venture Agreement states that the agreement shall be governed in all respects by the laws of the State of New York. NIOC argues that under the laws of New York a partner is generally not permitted to sue alone on rights belonging to the partnership. Yet even if it were established that the laws of the State of New York prevent a partner from bringing suit without its partner acting as co-claimant as the laws of Iran appear to do the Tribunal would, as confirmed by Haus, have to take into account international law. See id. This is consistent with Article V of the Claims Settlement Declaration, which forms the basis for the Tribunal's awards.
3. 24. As the Tribunal concluded in Haus,
  
  [w]hile international law seems to accept that as a rule a partner may not sue in his own name alone on a cause of action accruing to the partnership, where special reasons or circumstances required it, “international tribunals have little difficulty in disaggregating the interests of partners and in permitting” partners to recover their pro rata share of partnership claims. The most relevant “special circumstance” in this sense exists when a partner's claim is for its own interest, which is independent and readily distinguishable from a claim of the partnership as such.
  
  Id. at 24–25, reprinted in 9 Iran-U.S. C.T.R. at 330. The primary reason for allowing a partner to bring a claim individually is that he “would otherwise be prevented from claiming before an international forum because of a foreign partner's disability”. Id. at 27, reprinted in 9 Iran-U.S. C.T.R. at 332. The Tribunal observes that this rationale applies in the present Case.

Catherine Etezadi and Government of the Islamic Republic of Iran, Award No 554–319–1 (March 23, 1994), Dissenting Opinion of Richard M Mosk (March 23, 1994), reprinted in 30 Iran–US CTR 45, 45, 49–50 (1994):

I dissent from the award because I believe Claimant Catherine Etezadi, by virtue of her agreement with her husband and under applicable law, has a beneficial, and therefore enforceable, interest in certain assets that were held in her husband's name and that were wrongfully taken by Respondent, the Government of the Islamic Republic of Iran (hereinafter sometimes referred to as “Iran”).

…

The issue of choice-of-law with respect to marital rights in property normally arises in the context of death or divorce or, occasionally, in a claim by a creditor of the marital estate or of one of the spouses. This case is unusual in that the wife, with the husband's backing, is asserting certain beneficial rights in properties vis-a-vis a non-creditor third party. If there were a choice-of-law issue, the laws of several jurisdictions could be invoked.

At the time of marriage, the Etezadis were domiciled in New York; therefore, the law of New York could apply to any pre-marital or immediate post-marital agreements. See Hague Convention on the Law Applicable to Matrimonial Property Regimes (1976), art. 4, in 25 Am. J. of Comp. Law 393, 395 (1977) (applicable law is that of “the State in which both spouses establish their first habitual residence after marriage”); 2 Dicey and Morris on the Conflict of Laws 1058–59 (L. Collins 11th ed. 1987) (Rule 154(2)) (husband's domicile upon marriage); see also, E. Scoles, Choice of Law in Family Transactions, 209 Recueil des Cours 9, 28–30 (1989), and authorities cited therein (discussing “immutability of marital rights”).

The situs of the properties in issue are located in Iran, and thus Iran contends that Iranian law applies. See Civil Code of Iran, art. 966; see also id., art. 963 (“If husband and wife are not nationals of the same country, their personal and financial relations with one another will be subject to the (p. 140) laws of the country of the husband”).

California has been the marital domicile of the Etezadis since 1974. As such, its laws could be applied. See E. Scoles & P. Hay, Conflict of Laws § 14.4, at 468 (2d ed. 1992) (“In most instances, the state of dominant interest, as in other matters involving family and marital concerns, is the domicile of the parties”).

As I shall discuss, the relevant laws of these jurisdictions that can be applied in this case are consistent. See DIC of Delaware, et al. v. Tehran Redevelopment Corp., et al., Award No 176–255–3, p. 17 (26 Apr. 1985), reprinted in 8 Iran-U.S. C.T.R. 144, 156–57. The Tribunal is not restricted to applying the law of any specific place, for under Article V of the Claims Settlement Declaration, the Tribunal “shall decide all cases on the basis of respect for law, applying such choice-of-law rules and principles of commercial and international law as the Tribunal determines to be applicable, taking into account relevant usages of the trade, contract provisions and changed circumstances.”

There is not, however, a true conflict of laws, for under the law of the marital domicile at the relevant times—California—Mrs. Etezadi effectively obtained a one-half interest in the entire marital estate, including a beneficial interest in any property solely in the name of Mr. Etezadi. Under Tribunal jurisprudence, such beneficial interests are enforceable. See below.

United States of America and Islamic Republic of Iran (Case No B36), Award No 574-B-36–2 (December 3, 1996), reprinted in 32 Iran–US CTR 162, 180 (1996):

71. In the Tribunal's view, several factors in the present Case give strong support to the conclusion that the 1948 Contract was of an intergovernmental character, the governing law of which should be international law. The Contract was concluded between two sovereign States. It concerned the sale of military equipment belonging to the United States government. The terms of the Contract took effect on approval by the Majlis (the Iranian parliament), and the U.S. Congress approved a special appropriation to cover PHT costs. When the debts became due, the United States pursued the matter at the highest diplomatic levels and did not take the matter before any municipal forum. The foregoing points, in the absence of a choice of law provision, compel the Tribunal to determine that the applicable law of the 1948 Contract is international law.

Ouziel Aryeh, et al and Islamic Republic of Iran, Award No 584–839/840–3 (September 25, 1997), reprinted in 33 Iran–US CTR 460, 477 (1997) (footnotes omitted):

67. The Respondent's second objection to the validity of the Will is based on its alleged inconsistency with Jewish law. This contention, however, is supported only by a general statement of its invalidity by a Jewish authority in Tehran. By contrast, the legal opinion obtained by the Claimants is detailed and contains reference to authorities. The Tribunal notes that it generally makes more credible reading. Its facial credibility is further enhanced by the credentials of its author, who had been Chief Rabbi of Tehran for many years, including the relevant period. The Tribunal therefore decides that on its face, the Will appears not to be inconsistent with Jewish law and not for that reason invalid.

(2 ) Tribunal Rules (1983), Article 33(2)

The Iran–United States Claims Tribunal has not been authorized by the parties in any case to decide ex aequo et bono or as amiable compositeur.

(3 ) Tribunal Rules (1983), Article 33(3)

American Bell Intl Inc and Islamic Republic of Iran, Final Award No 255–48–3 (September 19, 1986), reprinted in 12 Iran–US CTR 170, 186–87 (1986-III):

54. That does not mean that force majeure was of no consequence to the question of termination costs. The Tribunal has decided that a portion of the departure was attributable to force (p. 141) majeure, and that force majeure prevented the negotiations relating to the financial consequences of the force reductions from being concluded. Thus force majeure. Although not the ultimate cause to which Claimant's termination costs can be attributed, created conditions which made it impossible for Claimant to recover what it was entitled to under the contract. Unlike those situations in which costs are directly attributable to force majeure, this does not reflect the allocation of risks as contemplated by Contract 138, but rather is a consequence of a situation unforeseen in the contract. In such circumstances the determination of the rights and liabilities of the parties is subject “to the Tribunal's equitable discretion, using the contract as a framework and reference point.” Queens Office Tower Associates and Iran National Airlines Corp., Award No 37172–1 at 14 (15 April 1983), reprinted in 2 Iran-U.S. C.T.R. 247, 254, International School Services Inc. and National Iranian Copper Industries Co., Award No 194–111–1 at 14 (10 Oct. 1985). In exercising its equitable discretion, the Tribunal must determine what the parties, in the light of their intentions as reflected in the contract, would have agreed upon as to the financial consequences of the force reductions, and what consequently is the reasonable compensation for the costs incurred.¹

…

[Footnote]1. The Tribunal notes that its task in the present respect is very similar to that faced by the arbitration tribunal in Kuwait v. The American Independent Oil Company (Aminoil), Award of 24 March 1982, (Reuter, Sultan, Fitzmaurice, arbs.), reprinted in 21 Int’l Legal Mat’ls 976 (1982), where the parties had conducted negotiations on the application of a new price formula without being able to complete these negotiations. The tribunal stated that “it thinks that it is not really a question of modifying or completing the contract … The Tribunal is not expected to devise new provisions that will govern the contractual relations of the Parties for the future, but to liquidate the various consequences of their past conduct, and of the contractual clauses that once bound them but are now at an end.” Id. at paragraph 75.

Iran National Airlines Co and United States of America, Award No 337-B10–2 (November 30, 1987), reprinted in 17 Iran–US CTR 238, 239–40 (1987-III):

1. Time Limitation and Applicable Law
4. The Tribunal notes that the Parties dispute the question of the law applicable to these transactions. The Respondent contends that GBL and GTR transactions are governed by U.S. law. The Claimant denies that U.S. law is applicable to these transactions, contending that Iranian law governs Iran Air passenger tickets and airwaybills. It argues generally that its submission of the relevant U.S. forms for air cargo and air travel together with its invoices should not be construed as an admission by the Claimant to the application of U.S. laws and regulations in the event of disputes.
5. For the reasons set forth in Case No B9 in relation to carriage of goods by air, Award No 335-B9–2, and in Case No B12 in relation to passenger transportation services, Award No 336-B12–2, the Tribunal finds that it is able to resolve all issues by reference to the practice of the Parties and to the terms of the contractual documents themselves, without entering into a discussion of the applicable law.

Benjam R Isaiah and Bank Mellat (as successor to International Bank of Iran), Award No 35–219–2 (March 30, 1983) at 10–11, reprinted in 2 Iran–US CTR 232, 237 (1983-I) (footnote omitted):

While it might be argued that Iranian law must be applied to this claim on the ground that the act giving rise to the unjust enrichment took place at least partly in Iran, and that the enrichment occurred there, it might also be argued that this is unnecessarily restrictive in view of the fact that the dishonored check was drawn on a New York bank and much of the underlying transaction occurred outside Iran.

(p. 142) Article V of the Claims Settlement Declaration leaves the Tribunal with considerable flexibility in this regard. It provides as follows:

Article V

The Tribunal shall decide all cases on the basis of respect for law, applying such choice of law rules and principles of commercial and international law as the Tribunal determines to be applicable, taking into account relevant usages of the trade, contract provisions and changed circumstances.

Under this rule, the Tribunal is free to apply general principles of law in a case such as this, although there is no reason to believe the result would be different if only Iranian law were applied.

(4 ) Other practice of the Iran–US Claims Tribunal

CMI Intl, Inc and Ministry of Roads and Transportation of Islamic Republic of Iran, Award No 99–245–2 (December 27, 1983) at 8–9, reprinted in 4 Iran–US CTR 263, 267–68 (1983-III):

B. Damages

1. Choice of Law

The Claimant argued the damage questions in terms of the statutory law of Idaho, which in this case is essentially the Uniform Commercial Code. As noted above, the purchase orders provided that they were governed by the laws of Idaho. The Tribunal does not believe, however, that it is rigidly tied to the law of the contract, at least insofar as the assessment of damages is concerned. Article V of the Claims Settlement Declaration provides:

The Tribunal shall decide all cases on the basis of respect for law applying such choice of law rules and principles of commercial and international law as the Tribunal determines to be applicable, taking into account relevant usages of the trade, contract provisions and changed circumstances.

It is difficult to conceive of a choice of law provision that would give the Tribunal greater freedom in determining case by case the law relevant to the issues before it. Such freedom is consistent with, and perhaps almost essential to, the scope of the tasks confronting the Tribunal, which include not only claims between the two Governments, certain claims between banking institutions, and issues of interpretation and implementation of the Algiers Declarations. Thus the Tribunal may often find it necessary to interpret and apply treaties, customary international law, general principles of law and national laws, “taking into account relevant usages of the trade, contract provisions and changed circumstances,” as Article V directs.

With respect to the assessment of damages, the Tribunal considers its main task to be determining what are the losses suffered by the Claimant and to award compensation therefor. Our search is for justice and equity, even in cases where arguably relevant national laws might be designed to further other and doubtless quite legitimate goals. In the present case, while application of the Uniform Commercial Code may not lead to substantially different conclusions from those adopted by the Tribunal (except with respect to accounting for profits on resales, which will be discussed below), the Tribunal prefers to analyze the damage questions in accordance with general principles of law, rather than by reference to the Code as incorporated in the statutory law of Idaho.

R J Reynolds Tobacco Co and Islamic Republic of Iran, Award No 145–35–3 (August 6, 1984) at 18–19, reprinted in 7 Iran–US CTR 181, 191–92 (1984-III):

4. The Tribunal's Findings on the Interest Claim

Claimant contends that it is entitled to interest based on the following terms and conditions appearing on the order acknowledgement form used in connection with the goods that are the subject of the claim:

Buyer [ITC] agrees to pay to Seller interest at three months libor [London International Offering Rate] (as quoted by the Financial Times of London) plus 2 per cent p.a. on all sums and for the (p. 143) duration such sums remain unpaid in excess of the agreed payment terms. Seller's occasional or continued omission to claim interest hereunder shall not be construed as a waiver.

The order acknowledgement form provides for the application of Swiss law to the sale. Under Swiss law, a contractually agreed upon rate of interest is binding on the parties to the contract. Swiss Code of Obligations, Article 104, Paragraph 2.

Claimant asserts that this clause permits the compounding of interest. Also the large profits of ITC from the sale of the unpaid cigarettes have been referred to by Claimant as a particular justification for compound interest.

The Tribunal, however, does not find that there are any special reasons for departing from international precedents which normally do not allow the awarding of compound interest. As noted by one authority, “[t]here are few rules within the scope of the subject of damages in international law that are better settled than the one that compound interest is not allowable.” III M. Whiteman, Damages in International Law 1997 (1943). Even though the term “all sums” could be construed to include interest and thereby to allow compound interest, the Tribunal, due to the ambiguity of the language, interprets the clause in the light of the international rule just stated, and thus excludes compound interest.

Anaconda-Iran, Inc and Islamic Republic of Iran, Award No ITL 65–167–3 (December 10, 1986), reprinted in 13 Iran–US CTR 199, 232–33 (1986-III):

130 … This Article [V of the Claims Settlement Declaration] has a vast scope of application. The Algiers Accords apply to a great number of claims arising out of contracts which may contain very differing provisions regarding applicable law. More importantly, Article V creates a novel system of determining applicable law. Contrary to NICIC's contentions, the Tribunal finds that according to this system the Tribunal is not required to apply any particular national or international legal system. On the contrary, the Tribunal is vested with extensive freedom in determining the applicable law in each case. This freedom is not a discretionary freedom, however, as the Tribunal is given a rather precise indication as to the factors which should guide its decision.
131. Contract provisions constitute one of these factors, but it is noteworthy that they are not listed first, nor foremost, among the factors enumerated. The Tribunal is of course required to take seriously into consideration the pertinent contractual choice of law rules, but it is not obliged to apply these if it considers it has good reasons not to do so.
132. In the present Case the TAA [Technical Assistance Agreement] does not contain any choice of law rules. For the reasons developed above, the Tribunal cannot on that ground conclude, as does the Claimant, that the TAA is self-sufficient under all circumstances and that no law shall govern the TAA. No more can the Tribunal conclude, as does the Respondent, that Iranian law is applicable because the place of conclusion and execution of the TAA was Iran. In most contract cases before the Tribunal the contracts actually were concluded and executed in Iran. If the States Parties to the Algiers Accords had intended that Iranian law would apply to all such cases which do not contain a contractual clause to the contrary, the Algiers Accords undoubtedly would have contained specific provisions to that effect. As we have seen, however, Article V created quite a different system.
133. In conclusion, the Tribunal notes that contractual limitations of remedies similar to the provision in Article 9 of the TAA frequently are included in international commercial contracts. In deciding the remaining issues in this Case, the Tribunal therefore must give particular consideration to the usages of the trade as well as principles of commercial and international law mentioned in Article V of the CSD. One of the legal issues which the Parties should brief in their future pleadings therefore is the relevant usages of the trade in respect of contractual limitations of remedies similar to the provisions contained in Article 9 of the TAA.

(p. 144) Jack Rankin (a claim of less than $250,000 presented by United States of America) and Islamic Republic of Iran, Award No 326–10913–2 (November 3, 1987), reprinted in 17 Iran–US CTR 135, 142–43 (1987-III):

1. Applicable Law
1. 21. Pursuant to Article V of the Claimant Settlement Declaration, the Tribunal is directed to decide all cases “on the basis of respect for law” and to apply “such choice of law rules and principles of commercial and international law as the Tribunal determines to be applicable.” With respect to these expulsion cases, however, it is clear that, contractual questions aside, only Iranian law and international law can be relevant. In the present Case there has been no allegation that the Claimant's departure involved violations of Iranian law, so the allegation of wrongfulness is to be determined by the standards of international law.
2. 23. For the reasons stated in Phelps Dodge Corp. et al., and The Islamic Republic of Iran, Award No 217–99–2 (19 March 1986) and Amoco International Finance Corporation and The Government of the Islamic Republic of Iran, et al., Award No 310–56–3 (14 July 1987), the Tribunal need not determine whether the Treaty of Amity today remains in force between the two State Parties, as it was clearly applicable at the time the claim arose and is, pursuant to Article V of the Claims Settlement Declaration, a relevant source of law on which the Tribunal is justified in relying in reaching its decision.

Footnotes:

¹ Chapter 2 addresses the regulatory relationship of the legal system of the place of the arbitration to the arbitral proceedings. Finer distinctions between the different meanings of “applicable law” are possible, distinguishing, for example, between the applicable “governing law,” “procedural law” and “substantive law.” See V Heiskanen, “Theory and Meaning of the Law Applicable in International Commercial Arbitration,” (1993) IV Finnish Ybk of Intl L 98, 111.

² See Report of the Secretary-General on the Preliminary Draft Set of Arbitration Rules, UNCITRAL, 8th Session, UN Doc A/CN.9/97 (1974), reprinted in (1975) VI UNCITRAL Ybk 163, 178 (Commentary on Draft Article 27).

³ Article 33 of the 1976 UNCITRAL Rules provides:

1. The arbitral tribunal shall apply the law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.
2. The arbitral tribunal shall decide as amiable compositeur or ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so and if the law applicable to the arbitral procedure permits such arbitration.
3. In 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.

⁴ Report of the Secretary-General on the Revised Draft Set of Arbitration Rules, UNCITRAL, 9th Session, Addendum 1 (Commentary), UN Doc A/CN.9/112/Add.1 (1975), reprinted in (1976) VII UNCITRAL Ybk 166, 178 (Commentary on Draft Article 28(1)).

⁵ For example, according to Article 21(1) of the ICC Rules as revised in 2012, “[t]he parties shall be free to agree upon the rules of arbitration to be applied by the arbitral tribunal to the merits of the dispute.”

⁶ Article 28(1) of the UNCITRAL Model Law provides: “The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. 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.”

On party autonomy see also N Blackaby and C Partasides with A Redfern and M Hunter, Redfern and Hunter on International Arbitration (5th edn 2009) 195–9; J Lew, Applicable Law in International Commercial Arbitration (1978) 72 et seq; O Lando, “The law applicable to the merits of the dispute,” (1986) 2 Arb Intl 104, 107; C Croff, “The Applicable Law in International Commercial Arbitration: Is It Still a Conflict of Laws Problem?” (1982) 16 Intl Lawyer 613, 615, 642; American Bell Intl, Inc, Concurring and Dissenting Opinion of Judge Mosk, reprinted in section 2(D)(1).

⁷ This designation is clear, for example, when the parties have agreed to arbitration under NAFTA Chapter Eleven. See Methanex Corp (1976 Rules), reprinted in section 2(C).

⁸ Article 27(1) of the Preliminary Draft to the 1976 Rules provided: “The arbitrators shall apply the law expressly designated by the parties as applicable to their contract.” The delegations of France, Hungary and the United States proposed the replacement of this by a provision to the effect that “[t]he arbitral tribunal shall apply the law designated by the parties … Such designation must be contained in an express clause, or unambiguously result from the contract … ” See Summary Record of the 14th Meeting of the Committee of the Whole (II), UNCITRAL, 9th Session, UN Doc A/CN.9/9/C.2/SR.14, at 2, para 1 (1976). On suggestion by the UK representative, Mr Guest, the second sentence quoted above was deleted, “since it would not necessarily be in accordance with all legal systems.” See 2, para 2.

⁹ For example, the fact that the parties have used a contractual formula known in a particular country which moreover happens to be the place of performance of the contract might be considered tacit designation of the law of that country as the applicable substantive law. See O Lando, “The law applicable to the merits of the dispute,”n 6, 107–8. The same result, however, in most cases is probably obtainable with the help of the principle expressed in the second sentence of Article 35(1), discussed below. As the inferring of a tacit designation could in some jurisdictions create the risk of a successful court challenge on the ground of excess jurisdiction by the arbitrators, the alternative based on the second sentence is preferable.

¹⁰ See Chapter 2, section 4 on Article 18(1). Although at one time the choice of the place of arbitration was seen on occasion to constitute a tacit choice of the law of the country. Von Mehren even referred to “a developing tendency to link the situs of the arbitration with the choice of substantive law,” R von Mehren, “Arbitration in Central and Eastern Europe,” (September 1992) 47 Arb J 38, 40. However, we tend to agree with Lando that even then “an opposite trend [was] discernible” in this regard. O Lando, “The law applicable to the merits of the dispute,” n 6, 136. Today, we would think it quite unusual for such a link to be made.

¹¹ A choice of law clause may read for example as follows: “This contract shall be governed by and construed in accordance with the law of … ”

¹² See J Lew, Applicable Law, n 6, 140–5.

¹³ Report on the Work of the Session, 51st Session, Second Reading, A/CN.9/684, para 92 (2009). Indeed, this principle underlies Article 33(1) of the 1976 Rules as well, which, according to a statement in the Report of the Committee of the Whole II, “was intended as a reference to the internal law of that country not including its rules on conflict of laws or renvoi,” Report of the UN Commission on International Trade Law on the Work of its Ninth Session, UN GAOR, 31st Session, Supp No 17, UN Doc A/31/17, para 172 (1976), reprinted in (1976) VII UNCITRAL Ybk 66, 78 (Commentary on Draft Article 28(1)).

¹⁴ This kind of caution was recommended for those concluding joint venture agreements, for example, with the former Soviet partners. See J Hertzfeld, “Applicable Law and Dispute Settlement in Soviet Joint Ventures,” (1988) 31 ICSID Rev—Foreign Investment L J 249, 254 (“When inserting foreign law provisions in their agreements, parties should draft them carefully. If, for example, the parties intend to choose Swedish material law to govern their rights and obligations, they should be careful to exclude Swedish choice of law principles from their clause, since the application of such principles is likely to lead to a renvoi to some other legal system to the parties’ mutual surprise.”). Even after the collapse of the Soviet Union similar caution may be recommendable in relations with parties from former Soviet Republics. See also G Delaume, Law and Practice of Transnational Contracts (1988) 5–6.

¹⁵ See G Delaume, Law and Practice, n 14, 30; W Peter, Arbitration and Renegotiation of International Investment Agreements (1988) 88. On arbitral practice (which is not uniform) in this regard, see J Lew, Applicable Law, n 6, 136 et seq.

¹⁶ See Mobil Oil Iran (1983 Tribunal Rules), reprinted in section 2(D)(4) at para 59 (showing one version of such a provision).

¹⁷ J Paulsson and G Petrochilos, “Revision of the UNCITRAL Rules,” (A Report Commissioned by the UNCITRAL Secretariat), March 31, 2006, 138–9.

¹⁸ Settlement of Commercial Disputes: Revision of the UNCITRAL Arbitration Rules, Note by the Secretariat, UNCITRAL, UN Doc A/CN.9/WG.II/WP.143/Add.1 at 9, para 30 (2006).

¹⁹ See UNCITRAL, UN Doc A/CN.9/WG.II/WP.143/Add.1 at 9, para 30; see also Washington Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, Oct 14, 1966, 17 UST 1270, TIAS 6090, 575 UNTS 159, art 42.

²⁰ See UNCITRAL, UN Doc A/CN.9/WG.II/ /WP.143/Add.1, n 19, at para 42.

²¹ A well known “successful” application of lex mercatoria by an international tribunal is the Norsolor case. In it, an ICC arbitral tribunal, with its seat in Vienna, applied lex mercatoria to a dispute between a Turkish and a French party. The award (reprinted in (1984) 9 Ybk of Commercial Arb 109) was annulled by an Austrian Court of Appeal which regarded lex mercatoria as of questionable value. This decision was subsequently reversed by the Supreme Court and the award enforced in France. Another important decision was rendered by the English Court of Appeal in Deutsche Schachtbau- und Tiefbohrgesellschaft mbH (DST) v Ras Al Khaimah National Oil Co (Rakoil), (1987) 3 WLR 1023. In the ICC award made in Switzerland, the tribunal applied “internationally accepted principles of law governing contractual relations.” The Court of Appeal held that the award was enforceable under the New York Convention. On these cases and other relevant practice, see C Stoecker “The Lex Mercatoria: To what Extent does it Exist?” (1990) 7(1) J Intl Arb 101,123–4; E Paasivirta, Participation of States in International Contracts and the Arbitral Settlement of Disputes (1990) 134–6; B Goldman “Lex mercatoria,” (November 1983) 3 Forum Internationale, 15–17; D Rivkin, “Enforceability of Arbitral Awards Based on Lex Mercatoria,” (1993) 9(1) Arb Intl 67–84. In the cases mentioned above the question was of the arbitrators’ choice of non-national law. This would appear to support the proposition that the parties a fortiori may make such a choice. See Rivkin, 78. For a comparative review of the situation in a number of countries, see F Dasser, Internationale Schiedsgerichte und lex mercatoria (1989) 200 et seq. See also O Lando, “The Lex Mercatoria in International Commercial Arbitration,” (1985) 34 ICLQ 747, 755–63 and I Schultsz, “Ein neues Schiedsgerichtsgesetz für die Niederlande,” (1987) 7 Praxis des Internationalen Privat und Verfahrensrechts 383, 384 (Dutch arbitration law allows the parties to select lex mercatoria as applicable substantive law).

²² O Lando, “The Lex Mercatoria,” n 21, 756 (referring to Article VII (2) of the ECCA).

²³ See R David, Arbitration in International Trade (1985) 341–2. The travaux préparatoires to the 1976 Rules do not, however, show any explicit intention to have lex mercatoria included in the “rules of law.” The wording seems to have been chosen with a view to facilitating both the application of various national laws and the acceptability of the selection of “rules embodied in a convention or a similar legal text elaborated on the international level, even if not yet in force or not in force in any State connected with the parties or their transaction.” Report of the UN Commission on International Trade Law on the Work of its Eighteenth Session, UN GAOR, 40th Session, Supp No 17, UN Doc A/40/17, at 45, para 232 (1985). With respect to the 1985 Hague Convention on the Law Applicable to International Sale of Goods it is questionable whether lex mercatoria is an acceptable choice of law. In Article 15 “law” is defined to mean “the law in force in a State other than its choice of law rules.” Some would read this to exclude lex mercatoria, while others are against such an interpretation. See O Lando, “The 1986 Hague Convention on the Law Applicable to Sales,” (1987) 51 Rabels Zeitschrift 60, 66–7. The EC Convention on the law applicable to contractual relations (Convention 80/934 EEC of June 19, 1980) has been argued to exclude lex mercatoria. See A Kassis, Le nouveau droit européen des contrats internationaux (1993) 373 et seq.

²⁴ See section 2(B)(5) (A Note on the Iran–US Claims Tribunal).

²⁵ In Norsolor, the Austrian Supreme Court held that the application of lex mercatoria “neither contradicts nor violates any of the imperative rules to be found in the law in vigor in either of the two concerned States … ” cited in B Goldman, “Lex mercatoria,”, n 21, 17. See also American Bell Intl, section 2(D)(1) (finding it unnecessary to discuss the applicable law as the result would be the same under any such law, whether international or national).

²⁶ The famous statement by the Permanent Court of International Justice in the Serbian Loans case that “[a]ny contract which is not a contract between states acting in their capacity as subjects of international law, is based on the municipal law of some country,” 1929 PCIJ series A No 20, at 41 (July 12, 1929), cannot be regarded as valid law today. Yet, according to J Lew, Applicable Law, n 6, 405, “no award has been found where arbitrators have actually applied positive rule of public international law to the substance of a private commercial dispute.” But see O Lando, “The Law Applicable to the Merits of the Dispute,” in P Šarčević (ed) Essays on International Commercial Arbitration (1989) 129, 145 (“Rules of public international law may also be applied to disputes between private enterprises.”).

²⁷ See Case No B36 (1983 Tribunal Rules), reprinted in section 2(D)(1). The questions concerning the law applicable to state contracts and related issues have generated an abundance of literature. See, eg, G Delaume, Law and Practice, n 14; W Peter, Arbitration and Renegotiation, n 15; E Paasivirta, Participation of States in International Contracts, n 21; J-P Regli, Contrats d’Etat et arbitrage entre Etats et personnes privées (1983).

²⁸ See Mobil Oil Iran (1983 Tribunal Rules), reprinted in section 2(D)(4), in which the Iran–US Claims Tribunal held, when interpreting the relevant clause of the Contract (Award, para 59), “that the law applicable to the Agreement is Iranian law for interpretative issues, and the general principles of commercial and international law for all other issues” (para 81).

²⁹ See n 6, and H Holtzmann and J Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (1989) 766–8.

³⁰ For some, the term “law” is taken to limit legal rules and principles to those in force, thus excluding, for example, Roman law or other ancient laws, except insofar as they form part of an existing legal system. See Ouziel Aryeh (1983 Tribunal Rules), reprinted in section 2(D)(1) (considering the application of Jewish law as it relates to Iranian law). However, as discussed in the text in regard to lex mercatoria, this appears to be a minority view.

³¹ Indeed, international conventions not in force for the state in question are sometimes regarded as one source on the basis of which the contents of lex mercatoria can be determined. See, eg, F Dasser, Internationale Schiedsgerichte, n 21, 102–3.

³² Report of the Secretary-General on the Revised Draft Set of Arbitration Rules, UNCITRAL, 9th Session, Addendum 1 (Commentary), UN Doc A/CN.9/112/Add.1 (1975), reprinted in (1976) VII UNCITRAL Ybk 166, 178 (Commentary on Draft Article 28, para 3). On the discussion on the preparatory stage, see S Baker and M Davis, The UNCITRAL Arbitration Rules in Practice: The Experience of the Iran-United States Claims Tribunal (1992) 175–7.

³³ See Lando, “The Law Applicable to the Merits of the Dispute,”, n 26, 156–9. See also S Jarvin, “Arbitrability of Anti-Trust Disputes: The Mitsubishi v. Soler Case,” (1985) 2(3) J Intl Arb 69. EC competition law for the member states is largely of a public policy nature. A court of a member state to which an application is made may be bound under EC law to annul the award. See Eco Suris China Time Limited v Benetton International NV (Case C-126/97, judgment June 1, 1999, ECR I-3055). See also G Zekos, “Eco Swiss China Ltd v. Benetton International NV–Court's involvement in arbitration,” (2000) 17(2) J Intl Arb 91–4; N Blackaby and C Partasides, Redfern and Hunter on International Arbitration, n 6, 205–7.

³⁴ See N Blackaby and C Partasides, Redfern and Hunter on International Arbitration, n 6, 530–1. According to Article V(2)(b) recognition and enforcement of an arbitral award may be denied if it would be against the public policy of the country. See C Croff, “The Applicable Law in International Commercial Arbitration,” n 6, 619, for an example of a dispute relating to the installation of a nuclear plant, in which the enforcement might be against public policy for reasons of substantive law. If such a dispute has been arbitrated with the application of substantive law other than that of the country where the plant is sited, the award might not be enforceable in that country. But see Croff, 638–9 (arguing that Art V of the New York Convention could not be invoked at all for reasons related to the applicable substantive law).

³⁵ O Lando, “The law applicable to the merits of the dispute,” n 6, 107. But see J Lew, Applicable Law, n 6, 132–5 (citing a few cases where the parties’ choice has been rejected by the arbitrators). As noted by Lew, “these few awards show no tendency sufficient to give rise to some exception to the general rule.” Lew, 132. One author has concluded that “[t]he prevailing trend at present, reinforced by international Conventions, is to allow parties complete freedom of choice as regards the law applicable to the substance of the award.” R David, Arbitration in International Trade, n 23, 343.

³⁶ Webster argues that “if the parties have not agreed on the applicable law, then one of the issues to be dealt with in the Statement of Claim should be the applicable law or laws that are applicable to the dispute pursuant to Art. 35.” T Webster, Handbook of UNCITRAL Arbitration—Commentary, Precedents and Materials for UNCITRAL Based Arbitration Rules (2010) 308.

³⁷ Report of the Working Group on Arbitration and Conciliation on the Work of its Forty-Seventh Session (Vienna, 10–14 September 2007), UNCITRAL, 41st Session, UN Doc A/CN.9/641, at 21, para 108 (2007).

³⁸ See UNCITRAL 47th Session, UN Doc A/CN.9/641, n 37, para 108; see also, UNCITRAL Model Law, as amended, art. 28(2).

³⁹ UNCITRAL 47th Session, UN Doc A/CN.9/641, n 37, para 108.

⁴⁰ Settlement of Commercial Disputes: Revision of the UNCITRAL Arbitration Rules Note by the Secretariat, UNICTRAL, UN Doc A/CN.9/WG.II/WP.145/Add.1 at 18, para 38 (2006).

⁴¹ UNCITRAL 47th Session, UN Doc A/CN.9/641 (2007), n 37, para 110.

⁴² UNCITRAL 47th Session, UN Doc A/CN.9/641 (2007), n 37, para 110.

⁴³ UNCITRAL 47th Session, UN Doc A/CN.9/641 (2007), n 37, para 110.

⁴⁴ UNCITRAL 47th Session, UN Doc A/CN.9/641 (2007), n 37, para 110.

⁴⁵ UNCITRAL 47th Session, UN Doc A/CN.9/641 (2007), n 37, para 111. The proposed wording was as follows: “In the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate.”

⁴⁶ Report of Working Group II (Arbitration and Conciliation) on the Work of its Fifty-First Session (Vienna, 14-18 September 2009), UNCITRAL, 43rd Session, UN Doc A/CN.9/684, at 21, para 94 (2009).

⁴⁷ UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 95.

⁴⁸ UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 95.

⁴⁹ UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 96.

⁵⁰ UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 96.

⁵¹ UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 96.

⁵² See CME Czech Republic BV (1976 Rules), reprinted in Section 2(C).

⁵³ See N Blackaby and C Partasides, Redfern and Hunter on International Arbitration, n 6, 228–9.

⁵⁴ Report of the UN Commission on International Trade Law on the Work of its Ninth Session, UN GAOR, 31st Session, Supp No 17, UN Doc A/31/17, para 172 (1976), reprinted in (1976) VII UNCITRAL Ybk 66, 78 (1976) (Commentary on Draft Article 28(3)). More clarification on the issue is cast by the following quotation from Mr Holtzmann (United States) who said “that different legal systems placed different interpretations on the two terms. Furthermore, there was disagreement among legal scholars as to their exact meaning. Consequently, the sponsors of the proposal had decided to include both terms in the text so that parties would be free to use either, depending on the legal system to be applied.” Summary Record of the 14th Meeting of the Committee of the Whole (II), UNCITRAL, 9th Session, UN Doc A/CN.9/9/C.2/SR.14, at para 19 (1976).

⁵⁵ While no ex aequo et bono or amiable compositeur award rendered under the UNCITRAL Rules is known to the authors, the ICSID case Benvenuti et Bonfant and People's Republic of Congo, Award of August 8, 1980 (Trolle, Bystricky, Razfindralambo, arbitrators), reprinted in (1982) 21 ILM 740, can be cited as an example of an ex aequo et bono decision made with the authorization of the parties. The agreement of the parties to allow the tribunal to decide ex aequo et bono was presented to the arbitrators, in the form of minutes of a meeting, during the hearings and subsequently recorded in an order by the arbitral tribunal. See (1982) 21 ILM at 746, para 122.

⁵⁶ See UNCITRAL Legal Guide on Drawing Up International Contracts for the Construction of Industrial Works 313, para 29 (1988) (“It is advisable for the parties to be cautious about authorizing the arbitral tribunal to decide disputes ex aequo et bono or to act as amiable compositeur, since arbitrators are not permitted to do so under some legal systems. In addition, such authorization may be interpreted in different ways and lead to legal insecurity.”).

⁵⁷ Settlement of Commercial Disputes: Revision of the UNCITRAL Arbitration Rules, Note by the Secretariat, UNCITRAL, UN Doc A/CN.9/WG.II/WP.143/Add.1, at 9–10, para 31 (2006) (“The Working Group might wish to note that rules of certain arbitration centres (article 17.3 of the ICC Rules, article 22.4 of the LCIA Rules and article 28.3 of the AAA Rules) require authorization by the parties for the arbitral tribunal to decide as amiable compositeur or ex aequo et bono and do not include a requirement that the law applicable to the arbitral procedure permit an arbitration to be decided ex aequo et bono.”).

⁵⁸ See generally Chapter 2. See also Summary Record of the 14th Meeting of the Committee of the Whole (II), UNCITRAL, 9th Session, UN Doc A/CN.9/9/C.2/SR.6, at 4–5, paras 22–31 (1976).

⁵⁹ For example, according to § 31(3) of the Finnish Arbitration Act of 1992, the award may be based on what the arbitrators find reasonable (ex aequo et bono), provided the parties have expressly authorized them to do so.

⁶⁰ According to Article 28(3) of the Model Law, as amended, “[t]he arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorized them to do so.”

⁶¹ See American Bell Intl, Inc (1983 Tribunal Rules), reprinted in section 2(D)(3).

⁶² See B Poznanski, “The Nature and Extent of an Arbitrator's Powers in International Commercial Arbitration,” (1987) 4(3) J Intl Arb 71, 79 (“Amiable composition does not mean that an arbitrator cannot apply rules of substantive law, it simply removes the imperative and obligatory character of such law and allows the arbitrator to choose that which he wishes to apply.”).

⁶³ See B Poznanski, “The Nature and Extent of an Arbitrator's Powers,” n 62, 80; S Stein and D Wotman, “International Commercial Arbitration in the 1980s: A Comparison of the Major Arbitral Systems and Rules,” (1983) 38 Business Lawyer 1685, 1714.

⁶⁴ An almost identical provision is contained in Article 28(4) of the Model Law, as amended.

⁶⁵ See Report of the Secretary-General on the Revised Draft Set of Arbitration Rules, UNCITRAL, 9th Session, Addendum 1 (Commentary), UN Doc A/CN.9/112/Add.1 (1975), reprinted in (1976) VII UNCITRAL Ybk 166, 179 (Commentary on Draft Article 28).

⁶⁶ Article 27(4) of the Preliminary Draft; Article 28(4) of the Revised Draft.

⁶⁷ The reasons behind the change were explained by Mr Holtzmann (USA) who noted, inter alia, that “[t]he ECE arbitration rules had not been used by many American corporations precisely because they contained” the more ambiguous wording “take into account.” Summary Record of the 17th Meeting of the Committee of the Whole (II), UNCITRAL, 9th Session, UN Doc A/CN.9/9/C.2/SR.17, at 4, para 23 (1976).

Mr Sanders (Special Consultant of the UNCITRAL Secretariat) commented that “although in practice arbitrators normally applied the terms of the contract very strictly in any case, the words ‘in accordance with’ underlined the primary importance of the contract and were therefore acceptable.” UNCITRAL, 9th Session, UN Doc A/CN.9/9/C.2/SR.17, n 67, at 5, para 24. For further discussion, see also UNCITRAL, paras 25–33. See also Summary Record of the 18th Meeting of the Committee of the Whole (II), UNCITRAL, 9th Session, UN Doc A/CN.9/9/C.2./SR.18, at 2, para 1 (1976).

In contrast, Article 22(2) of the 2012 ICC Rules states: “The arbitral tribunal shall take account of the provisions of the contract, if any, between the parties and of any relevant trade usages.” (Emphasis added.) Yves Derains and Eric Schwartz looking to this same language in an earlier version of the ICC Rules note that the language merely obliges the Arbitral tribunal “to take account of its provisions, and, unlike some other rules [citing inter alia the UNCITRAL Rules], does not explicitly require the tribunal to render its decision ‘in accordance’ therewith.” Y Derains and E Schwartz, A Guide to the New ICC Rules of Arbitration (2005) 224.

⁶⁸ See, eg, Zeevi Holdings (1976 Rules), at para 106, reprinted in section 2(C).

⁶⁹ See M Mustill, “The New Lex Mercatoria: The First Twenty-Five Years,” in I Brownlie and M Bos (eds) Liber Amicorum for the Rt. Hon. Lord Wilberforce (1987) 149, 153 (“most disputes turn on the facts and on the words of the contract”); J Crook, “Applicable Law in International Arbitration: The Iran-U.S. Claims Tribunal Experience,” (1989) 83 AJIL 278, 280 (“A majority of the claims have been decided entirely or substantially on the basis of the parties’ contracts”); O Lando, “The law applicable to the merits of the dispute,” n 6, 148 (“Many arbitrations turn upon the interpretation of a contract. Although continental countries have statutory rules on interpretation, arbitrators seldom invoke them. The interpretation of a contract is generally based on reason and logic, and they are communal property.”).

⁷⁰ See Rexnord, Inc (1983 Tribunal Rules), reprinted in section 2(D)(1).

⁷¹ See American Bell Intl, Inc (1983 Tribunal Rules), Final Award, at para 54, reprinted in section 2(D)(3).

⁷² Economy Forms Corp (1983 Tribunal Rules), reprinted in section 2(D)(1). See DIC of Delaware, Inc (1983 Tribunal Rules), reprinted in section 2(D)(1).

⁷³ Article 1(8) provides that “(1) The parties are bound by any usage to which they have agreed and by any practice which they have established between themselves. (2) The parties are bound by a usage that is widely known to and regularly observed in international trade by parties in the particular trade concerned except where the application of such usage would be unreasonable.” See also Article 9 of the UN Convention on Contracts for the International Sale of Goods.

⁷⁴ See P Sanders, “Commentary on UNCITRAL Arbitration Rules,” (1977) II Ybk Commercial Arb 177, 211. The Paulsson and Petrochilos study preceding the 2010 Revision recommended that the tribunal decide in accordance with both terms of the contract and trade usages. J Paulsson and G Petrochilos, “Revision of the UNCITRAL Rules,” (A Report Commissioned by the UNCITRAL Secretariat), March 31, 2006, at para 20. That extension was not raised in the initial Secretariat Note and is not mentioned anywhere in the official record of the revision effort.

⁷⁵ UNCITRAL, 41st Session, UN Doc A/CN.9/641, n 37, at 22, para 113.

⁷⁶ UNCITRAL 41st Session, UN Doc A/CN.9/641, n 37, para 113.

⁷⁷ UNCITRAL, 43rd Session, UN Doc A/CN.9/684, n 46, at 22, para 98.

⁷⁸ UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 99.

⁷⁹ UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 99.

⁸⁰ UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 99.

⁸¹ UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 99.

⁸² UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 99.

⁸³ UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 99.

⁸⁴ UNCITRAL 43rd Session, UN Doc A/CN.9/684, n 46, para 99.

⁸⁵ Note by the Secretariat, UNCITRAL 49th Session, UN Doc A/CN.9/WG.II/WP.143/Add.1, at para 30 (2006).

⁸⁶ The Model Law's reference to “rules of law” (instead of “law”) was chosen on the explicit understanding that it would allow the parties “to choose provisions of different laws to govern different parts of their relationship, or to select the law of a given State except for certain provisions … ” Report of the UN Commission on International Trade Law on the Work of its Eighteenth Session, UN GAOR, 40th Session, Supp No 17, UN Doc A/40/17, at 45, para 232 (1985), reprinted in H Holtzmann and J Neuhaus, A Guide to the UNCITRAL Model Law, n 29, 550, 804–5. In the Report referred to it was noted, however, “that the right to select provisions of different laws for different parts of the relationship (the so-called dépecage) was recognized by most legal systems even under the more traditional approach” represented, inter alia, by Article 33(1) of the UNCITRAL Rules. Report, para 233. Thus in the application of Article 33(1) such a selection of various laws should be considered precluded only (in the unlikely case) where it violates the ordre public of the law of the place of arbitration or, if known, the probable place of enforcement.

As to the practice generally, see V Heiskanen, “Forbidding Dépecage: Law Governing Investment Treaty Arbitration,” 32 Suffolk Transnatl L Rev 367 (concluding “dépecage may be here to stay”).

⁸⁷ See M Pryles, “Application of the Lex Mercatoria in International Commercial Arbitration,” (2004) 78 Australian L J 396; M Brunetti, “The Lex Mercatoria in Practice: The Experience of the Iran-United States Claims Tribunal,” (2002) 18 Arb Intl 355; T Carbonneau, Lex Mercatoria and Arbitration (1990); O Lando, “The Lex Mercatoria,” n 21, 747; M Mustill, “The New Lex Mercatoria,” n 69; B Goldman, “Lex mercatoria,” n 21; F Dasser, Internationale Schiedsgerichte, n 21; C Stoecker, “The Lex Mercatoria: To what Extent does it Exist?” n 21.

⁸⁸ But see M Mustill, “The New Lex Mercatoria,” n 69, 160 (“I suggest that the answer must surely be no.”). Also David interprets the 1976 UNCITRAL Rule as providing “that a particular national law will always ultimately be applied by the arbitral tribunal … ” R David, Arbitration in International Trade, n 23, 342.

⁸⁹ Reasons for such a failure may be many: negotiators are more concerned with commercial clauses than the applicable law; they may not foresee the possibility of the terms of the contract themselves not being able to regulate any possible situation; if they do foresee such a situation, they may not be able to agree on the applicable law. See C Croff, “The Applicable Law in International Commercial Arbitration,” n 6, 623. See also J Lew, Applicable Law, n 6, 221–2.

⁹⁰ Article 28(2): “Failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.” It was noted, however, that “since the Model Law did not provide for court review of an award on the ground of wrong application of Article 28, it served as little more than a guideline for the arbitral tribunal.” Report of the UN Commission on International Trade Law on the Work of its Eighteenth Session, UN GAOR, 40th Session, Supp No 17, UN Doc A/40/17, at 47, para 238 (1985). See also H Holtzmann and J Neuhaus, A Guide to the UNCITRAL Model Law, n 29, 769–70. Even pending the adoption of the Model Law in various countries, the same is the case with the UNCITRAL Rules in so far as the choice of the applicable conflict norms is very rarely likely to be a ground for successful setting aside or similar proceedings. Yet it is not totally excluded that a flagrantly arbitrary determination of the applicable law might in some jurisdictions be a ground for rejecting the recognition and enforcement of the award for public policy reasons by virtue of Article V(2)(b) of the New York Convention. See O Lando, “The law applicable to the merits of the dispute,” n 6, 110; C Croff, “The Applicable Law in International Commercial Arbitration,” n 6, 628. Therefore due consideration should be given to the issue.

⁹¹ This is confirmed by the discussion which took place in the course of the drafting process. While there was a suggestion for a wording to the effect that “the arbitral tribunal shall apply the law determined by the conflict of laws rules which it chooses” (instead of “deem applicable” as in both the Preliminary and Revised Draft—emphasis added), this was successfully opposed by several delegates, among them Mr Pirrung (Federal Republic of Germany) who “said that the use of the word ‘chooses’ … suggested that the arbitrators would have complete freedom with regard to the conflict of laws rules to be applied.” Summary Record of the 14th Meeting of the Committee of the Whole (II), UNCITRAL, 9th Session, UN Doc A/CN.9/9/C.2/SR.14, at 3, para 6 (1976). See also paras 1–15.

⁹² Report of the Secretary-General on the Revised Draft Set of Arbitration Rules, UNCITRAL, 9th Session, Addendum 1 (Commentary), UN Doc A/CN.9/112/Add.1 (1975), reprinted in (1976) VII UNCITRAL Ybk 166, 179 (Commentary on Draft Article 28(2)). The same approach is to be found also in Article VII(1) of the ECCA and in Article 38 of the ECE Arbitration Rules, both of which are referred to in the document just quoted. On the European Convention in this regard, see J Gentinetta, Die Lex Fori Internationaler Handelsschiedsgerichte (1973) 329–30.

⁹³ O Lando, “The law applicable to the merits of the dispute,” n 6, 110.

⁹⁴ On the selection of conflict-of-laws rules by arbitral tribunals, see J Lew, Applicable Law, n 6, 221 et seq.; O Lando, “The law applicable to the merits of the dispute,” n 6, 110–12; C Croff, “The Applicable Law in International Commercial Arbitration,” n 6, 341.

⁹⁵ O Lando, “The 1986 Hague Convention,” n 23, 95. See also N Blackaby and C Partasides, Redfern and Hunter on International Arbitration, n 6, 144–5. However, the rules of arbitration institutions in socialist countries used to provide for the application of the conflict rules of the place of arbitration. See R David, Arbitration in International Trade, n 23, 341.

⁹⁶ See O Lando, “The law applicable to the merits of the dispute,” n 6, 110.

⁹⁷ This result is often possible due to the pre-eminence of the relevant contract. See section 2(B)(3) on Article 33(3).

⁹⁸ See Carolina Brass, Inc (1983 Tribunal Rules), in section 2(D)(1). The case is discussed by J van Hof, Commentary on the UNCITRAL Arbitration Rules: The Application by the Iran-U.S. Claims Tribunal (1991) 236–8. See also O Lando, “The 1986 Hague Convention,” n 23, 140.

⁹⁹ See the discussion by H Holtzmann and J Neuhaus concerning the question whether “direct” determination of the applicable law should have been accepted under the UNCITRAL Model Law, in A Guide to the UNCITRAL Model Law, n 29, at 770 (“In the end, though it was widely recognized that the practical result would generally be the same regardless of which formulation were chosen, particularly with respect to whether reference to conflict of law rules was required. It was said that the reasons invoked by arbitral tribunals when they select the governing law directly, without separate reference to conflicts rules, are often similar to the connecting factors used in such rules.”). See Economy Forms Corp (1983 Tribunal Rules), reprinted in section 2(D)(1). On “non-national” conflict-of-laws systems generally, see J Lew, Applicable Law, n 6, 285 et seq.

¹⁰⁰ See C Croff, “The Applicable Law in International Commercial Arbitration,” n 6, 625.

¹⁰¹ See Haus Intl, Inc (1983 Tribunal Rules), reprinted in section 2(D)(1). See also Anaconda-Iran, Inc (1983 Tribunal Rules), reprinted in section 2(D)(4), at para 133.

¹⁰² See the ICC Award No 1434 of 1975, reported in (1976) 103 Journal du Droit International, in which the parties’ common view was that French law played an important—though not exclusive—role in the determination of that law as applicable.

¹⁰³ In England this would be regarded as a procedural issue, while in Sweden (and probably in most other civil law countries) the question would be classified as substantive. See also R Schütze, D Tscherning and W Wais, Handbuch des Schiedsverfahrens (1985) (in Germany the question of statute of limitation is a substantive law issue, whereas in England and the United States it would be regarded as a procedural matter) 332–3 (para 605).

¹⁰⁴ See H Holtzmann and J Neuhaus, A Guide to the UNCITRAL Model Law, n 29, 567, 768–9 (from the point of view of the Model Law, which in the present respect does not differ from the UNCITRAL Rules). See also DIC of Delaware, Inc (1983 Tribunal Rules), reprinted in section 2(D)(1).

¹⁰⁵ Report of the Working Group on Arbitration and Conciliation on the Work of its Forty-Seventh Session (Vienna, September 10–14, 2007), UNCITRAL, 47th Session, UN Doc A/CN.9/641, at 22, para 113 (2007).

¹⁰⁶ Report of the Working Group on Arbitration and Conciliation on the Work of its Forty-Eighth Session (New York, February 4–8, 2008), UNCITRAL, 48th Session, UN Doc A/CN.9/646, at15, para 65 (2008); and Report of Working Group II (Arbitration and Conciliation) on the Work of its Fifty-First Session (Vienna, September 14–18, 2009), UNCITRAL, 51st Session, UN Doc A/CN.9/684, at 22, para 98 (2009).

¹⁰⁷ Article 33 of the 1976 Rules, as modified in the Tribunal Rules, reprinted in Appendix 5. Article V of the Claims Settlement Declaration reads as follows:

¹⁰⁸ See J Crook, “Applicable law in International Arbitration,” n 69, 282; S Baker and M Davis, The UNCITRAL Arbitration Rules in Practice, n 32, 180–1.

¹⁰⁹ Anaconda-Iran, Inc (1983 Tribunal Rules), reprinted in section 2(D)(4), at para 131. See also CMI Intl, Inc (1983 Tribunal Rules), reprinted in section 2(D)(4), and G Hanessian, “General Principles of Law in the Iran-U.S. Claims Tribunal,” 27 Columbia J Transnatl L (1989) 309, 330 (discussing the reasons which led to a departure from the contractually agreed-upon choice of law clause).

¹¹⁰ Anaconda-Iran, Inc (1983 Tribunal Rules), reprinted in section 2(D)(4), at para 130.

¹¹¹ CMI Intl, Inc (1983 Tribunal Rules), reprinted in section 2(D)(4). In accordance with this flexibility, the Tribunal's “case law should be seen on a sliding scale from cases where national law is applied fully, to cases where national law is not applied at all but ‘overruled’ by general principles of international law, to cases where international law was applied directly, without any reference to national law.” J van Hof, n 98, 232. For examples of the Tribunal's approach in this regard, see, eg, Harnischfeger Corp (1983 Tribunal Rules); Sedco, Inc (1983 Tribunal Rules); United Painting Co, Inc (1983 Tribunal Rules); all reprinted in section 2(D)(1). See also Benjam R Isaiah (1983 Tribunal Rules), reprinted in section 2(D)(3), RJ Reynolds Tobacco Co (1983 Tribunal Rules), reprinted in section 2(D)(4), and Jack Rankin (1983 Tribunal Rules), reprinted in section 2(D)(4).

¹¹² Civil International Inc (1983 Tribunal Rules), reprinted in section 2(D)(4).

¹¹³ See cases reprinted in section 2(D)(1).

¹¹⁴ Anaconda-Iran, Inc (1983 Tribunal Rules), para 130, reprinted in section 2(D)(4).

¹¹⁵ See M Brunetti, The Lex Mercatoria in Practice, n 87; G Hanessian, “General Principles of Law,” n 109.

¹¹⁶ See section 2(B)(4) on Article 33(1).

¹¹⁷ See Amoco International Finance Corporation and Mobil Oil Iran Inc (1983 Tribunal Rules), reprinted in section 2(D)(1).

¹¹⁸ See J Crook, “Applicable Law in International Arbitration,” n 69; G Hanessian, “General Principles of Law,” n 109; J Westberg, “Applicable Law, Expropriatory Takings and Compensation in Cases of Expropriation,” (1993) 8 ICSID Rev-Foreign Investment L J 5; J Westberg, “The Applicable Law Issue in International Business Transactions with Government Parties—Rulings of the Iran-United States Claims Tribunal,” (1987) 2 ICSID Rev-Foreign Investment L J 473.

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