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Summary Week 4 – Arbitration or Litigation Applicable law
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CHAPTER 4 – Arbitration or Litigation Applicable law4.1Applicable law – Different or similar approaches in arbitration and litigation?
Whereas the preceding chapter focused on the procedural characteristics or arbitration and litigation this
chapter concentrates on the law to be applied in either arbitration or court litigation.
With respect to cross-border commercial arbitration, to start with, the ‘law to be applied’ may, depending
on the issue under discussion, relate to either the lex arbitri (the law governing certain procedural aspects),
or the law applying to the substance or merits of the commercial conflict (cf. improper deliverance of
goods/rendition of services; non-payment, etc.). Occasionally it may even occur that no positive ‘law’
whatsoever is being (explicitly) applied, because, as M. Moses puts it in the introductory lines of Chapter 4
‘(i)n some arbitrations, the arbitrators’ task will be primarily to understand the facts and to apply the
contract terms to the facts. Procedural issues will be resolved in accordance with the rules chosen by the
parties. Legal questions may not be raised or argued [emphasis SR]. In other arbitrations, difficult or
technical legal questions may be at the core of the dispute.’ This is, however, not common practice. After
all, most commercial disputes cannot be settled without the aid of any legal ‘framework’.
4.2 I and II Arbitration and litigation (functional overlap)
As regards the applicable law legal governing cross-border commercial relationships law practice often
demonstrates overlaps, as potentially speaking in both arbitration and litigation (partially) identical legal
sources may be applied to the substance or ‘merits’ of the dispute involved. In the context of litigation in
courts, Private International Law specialists tend speak of the ‘proper law of the contract’ or the lex causae.
Like for competence/jurisdiction matters cross-border commercial law endorses the principle of ‘party
autonomy’: parties in cross-border arbitration as well as litigation are attributed considerable (but not total,
cf. below) discretionary power to choose the law to be applied to their dispute (e.g. the law of
country A, B or C, but also e.g. the UN Convention on the International Sale of Goods, or
even a combination of laws – dépèçage, splitting the proper law). Even non-national ‘floating’ law
(e.g. ‘Contract Principles’, lex mercatoria, i.e. ‘the law merchant’) may be opted for.
Parties may further indirectly designate the applicable law by solely agreeing that arbitrators or courts shall
apply a certain set of conflict of law rules (also referred to as Private International Law - PIL), these rules
ultimately designating the law of a country A, B or C to be applied.
If for whatever reason the parties did not designate the law to be applied themselves it is for the arbitrators
or courts to establish which set of law rules shall be applied. In case of court proceedings we tend to speak
of ‘the objective proper law test’ or (US approach) ‘center of gravity’ test.
Last but certainly not least: today’s world is increasingly characterized by ‘socio-economic engineering’.
According to the lingua franca such legislative interventions are commonly referred to as ‘ordre public’ on
one hand, mandatory rules (Eingriffsnormen; lois d’application immediate; voorrangsregels; norme di
applicazione necessaria) on the other. As a consequence of both legislative categories party autonomy in
cross-border commerce may be considerably restricted (cf. competition laws, embargos, etc.).
Understandably these laws may interfere with party autonomy in arbitration as well as litigation. Central
questions are to which extent the ‘normal’ outcome of dispute settlement may be superseded by these
mandatory rules, and whether arbitrators tend to pay less attention to these rules than courts of sovereign
states or not.
, 4.3 Case study 1 – Toyota v. Sunshine continued…
Whilst recalling the constellation of facts provided for in case study of the course book:
1. Which law applies to the dispute at stake, and how is the lex causae (this is lingua franca for ‘the law
applicable to the dispute’) to be designated in SIAC arbitration proceedings?
2. Would it make a difference in case a court of either Japan or a court the Netherlands would adjudicate
the conflict between Toyota and Sunshine?
4.4 Case study 2 – Arbitration
An American manufacturer grants an exclusive distributorship to a Spanish importer, with a condition that
the right to resale shall apply in Spain and Portugal, but not to exports to Italy or France. The agreement
provides:
‘Disputes shall be settled via arbitration on line/skype, one arbitrator Spanish, one Portuguese and one
French arbitrator. The legal relationship between the parties shall be governed in all respects by the law of
California.’
When the American party initiates arbitral proceedings for breach of contract, the Spanish distributer argues
that the agreement amounts to an impermissible restraint of competition and counter-claims.
Why are questions ‘missing’ here?
Master course level presupposes that, even before solving the disputes at stake, students unravel versatile
issues to be taken into account!
4.5 Case study 3 - Litigation
‘Rüstungsdeal mit Russland - Rheinmetall bestreitet Exportstopp‘
Von Stefan Braun, Berlin, und Karl-Heinz Büschemann
(Aug 5, 2014, Süddeutsche Zeitung)
‚Beim Rüstungskonzern Rheinmetall werden die Worte sorgsam gewählt. Es sei nicht richtig, dass die
geplante Lieferung eines Gefechtsübungszentrums für 100 Millionen Euro an Russland gestoppt sei. "Das
ist nicht so", sagt ein Sprecher. Doch der Unternehmensvertreter räumt ein, dass es seit einiger Zeit
Gespräche mit der Bundesregierung "über eine Lösung" dieser Frage gebe.‘
'At the armaments company Rheinmetall, the words are carefully chosen. It is
not right that the planned delivery of a combat training centre for EUR 100
million to Russia has been stopped. "That's not the case," a spokesman said. But
the company representative admits that there have been discussions with the
federal government for some time "about a solution" to this issue.'
,Comment course coordinator: [this text was chosen as an ‘appetizer‘ with a view to the case study below -
German speaking students are kindly requested to translate this primary source!]
Other producers of military equipment face similar troubles. October 2013 Company A, residing in
Hamburg Germany being a 67% subsidiary of company X (residing in US) concluded a transaction with
Company B, residing in Moscow Russia, the latter company being highly interested in military
equipment (infrared detection; simulator software, etc.) developed by Company A. The contract further
provides in a series of intensive programs aimed at training specialists in the field.
From late spring 2014 onwards ’Western‘ and ‘Eastern‘ Europe experience political tension. German as
well as US ad hoc legislation prohibits transactions of ‘state of the art‘ high-tech military equipment
between companies residing in the ‘Western‘ hemisphere and contract partners in Russia.embargo These
public law biased interventions however clearly endanger the interest of employability. Besides, there is the
ancient contract law principle known as pacta servanda sunt: once the deliverance of military equipment is
overdue, Company B contemplates action against company A in a German court.
Questions:
1. Does a German court have jurisdiction?
2. Which law applies? Please take into account that ‘the contract between Companies A and B explicitly
excludes the application of the UN Convention on Contracts for the International Sale of Goods 1980.’
Also: compare the EU ‘Rome I’ Regulation with the ‘Hague Principles’ 2015.
3. May German Law prohibiting delivery of military equipment interfere? Compare, once again, the
approach adhered to by the EU ‘Rome I’ Regulation with the ‘Hague Principles’ 2015 methodology.
4. May US law prohibiting delivery of military equipment interfere?
The preceding case study is by no means exceptional or ‘academic/theorectical)! For a comparable, more
recent case on how ‘strategically’ important hard- and software may become a casus belli amongst legal
orders, and therefore influence (prohibit, restrict) contracting parties…
Cf. ‘Dutch company caught in crossfire of Sino-US feud for tech supremacy’:
https://asia.nikkei.com/Economy/Trade-war/Exclusive-ASML-chip-tool-delivery-to-China-delayed-amid-
US-ire.
Regulatory instruments
- (Sources referred to in preceding chapter).
- EU Regulation 593/2008 on the Law Applicable to Contractual Obligations.
- UN Convention on Contracts for the International Sale of Goods 1980.
- Hague Principles on choice of law in international commercial contracts (2015).
- Lex mercatoria (various websites, cf.
http://www.jus.uio.no/lm/en/html/private.international.commercial.law.html.)
Case law
- ECJ C-126/97 (ECO Swiss Time China Ltd – Benetton International BV).
- CJEU C-184/12 (Unamar NV – Navigation Maritime Bulgare).
, - CJEU C-352/13 (CDC – Akzo Nobel et al.)
Incl. Blog Comment R. Bellinghausen/J. Grothaus, posted July 31, 2015, available
http://kluwerarbitrationblog.com/blog/2015/07/31/the-cjeus-decision-in-cdc-v-akzo-nobel-et-al-a-
blessing-or-a-curse-for-arbitrating-cartel-damage-claims/.
Reading materials
Arbitration
- M. Moses, The principles and practice of international commercial arbitration Cambridge, 2017, Ch. 4.
- S. Jhangiani, Conflict of laws and international commercial arbitration – Can conflict be avoided?,
BCDR International Arbitration Review, (Kluwer Law International; Kluwer Law International 2015,
Volume 2 Issue 1) pp. 99 – 116):
available http://www.kluwerarbitration.com/CommonUI/document.aspx?id=kli-ka-biar-020106.
- M. Philippe, Hypochondria about the place of arbitration in on line proceedings, Kluwer Arbitration
Blog Sept. 16, 2015, available: http://kluwerarbitrationblog.com/blog/2015/09/16/hypochondria-about-
the-place-of-arbitration-in-online-proceedings/.
- Preamble of Hague Principles on Choice of Law in international commercial contracts (2015)
http://www.hcch.net/index_en.php?act=conventions.text&cid=135.;
Litigation
- M. Bogdan/M. Pertegas Sender, Concise Introduction to EU Private International Law, 3d ed. 2019,
Ch. 7.1-7.3, 7.5.
‘Appetizer’ (not mandatory):
- Rethinking choice of law and international arbitration in cross-border commercial contracts (Summer
2019), http://conflictoflaws.net/?s=arbitration&print=pdf-search. (source: www.conflictoflaws.net.
Tutorial:
-today: discuss 1st case with Sunshine and Toyota, feedback of general lecture, then US arbitration case, and 3rd
military equipment contract (interesting and timely)
-recall-Toyota v Sunshine-issue on weak performance of contract between Sunshine and Toyota – Sunshine took
action-which law applies to dispute and how is lex causae to be determined in the proceedings (SIAC)?
-first see what we are facingfork in the road-arbitration
-which law applies? See general lecture-recall it-what is the issue? Conflict, malperformance
-this is arbitration-what is the first question answered by chosen arbitration panel-the question of arbitrability of the
dispute is the first question and answer of the panel
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