Charles N. Brower, with the assistance of Jonathan C. Hamilton, “The Privatization of Rules of Decision in International Commercial Arbitration,” Liber Amicorum, Karl Heinz Böckstiegel (2001) (excerpt)

The wide-ranging privatization of the fora for resolution of disputes in international commerce has been accompanied, though at a more deliberate pace, by privatization of the rules of decision to be applied in such fora.  That is to say, just as contractual parties from two different countries naturally feel that any dispute between them will be heard and decided most neutrally, impartially, and therefore fairly by an international arbitral tribunal sitting in a third country, so, too, are they often inclined, for the same reasons, to agree that that tribunal should apply equally “neutral” legal principles. 

The dawn of the new millennium was marked by the worldwide retreat of state authority and the concomitant privatization of functions hitherto governmental.  A particularly prominent aspect of this trend has been the privatization of international commerce, including the systems for resolving disputes that inevitably arise in the course of such commerce.  Thus, as is by now well known, parties to international commercial transactions increasingly prefer to agree that any disputes between them be adjudicated, based on law and with binding legal effect, outside of any national court system, i.e., in international arbitration.  Indeed, the number of such arbitration proceedings worldwide has grown exponentially in recent years, and thanks to outstanding expert arbitrators such as Karl-Heinz Böckstiegel, the quality of justice resulting has been very high. 

What is not so well known—but which knowledgeable followers of Karl-Heinz Böckstiegel’s career well appreciate—is that this wide-ranging privatization of the fora for resolution of disputes in international commerce has been accompanied, though at a more deliberate pace, by privatization of the rules of decision to be applied in such fora.  That is to say, just as contractual parties from two different countries naturally feel that any dispute between them will be heard and decided most neutrally, impartially, and therefore fairly by an international arbitral tribunal sitting in a third country, so, too, are they often inclined, for the same reasons, to agree that that tribunal should apply equally “neutral” legal principles.  While the law of a third country often has been selected, non-national[1] rules prevailing in international commerce long have played a role, and increasingly parties have felt free to fashion their own rules of decision.[2]  The  object of the instant contribution in honor of Karl-Heinz Böckstiegel is to record, validate, and support this “do-it-yourself” choice….

It must be remembered that while international arbitral fora exist to provide non-national adjudication, their ability to do so with legally binding effect, and thus to produce enforceable awards, remains dependent on attachment to state power.  Indeed, the success of international arbitration is grounded in a series of modern national arbitration statutes that have facilitated such proceedings in key States, as well as on conventions ensuring recognition and enforcement of arbitral agreements and awards, most notably the New York Convention of 1958.[3]  The residual behavior-enforcing authority of States is as essential to the viability of arbitrating parties’ choice-of-law decisions as it is to the practical effectiveness of their choice of forum.  Both must be accepted by the ultimate (and only) source of executory power if they are to have the intended effect.

The question here, then, is “On what basis can non-national rules of decision agreed by parties be accepted as ‘law’?”  The answer is that it is on the basis of the universally accepted principle of party autonomy. As Karl-Heinz Böckstiegel himself has explained, party autonomy is a “well known condition for international commercial arbitration.”[4]  Party autonomy refers to “the autonomy of the parties to decide on all aspects of an international arbitration procedure, subject only to certain limitations of mandatory law.”[5]  If parties are free, inter alia, to determine the scope of the arbitration agreement, to prescribe the use of institutional or ad hoc arbitration procedures, to select the arbitral situs, to appoint the arbitrators and to specify the language of proceedings,[6] they must be just as free to choose the substantive law, or rules of decision, which will govern the proceedings.

Karl-Heinz Böckstiegel concurs: “On the basis of the recognition of party autonomy in international treaties, national legislation and court decisions, arbitral practice has generally accepted and enforced party autonomy both regarding the procedure and the applicable substantive law.”[7] This development “is the result of separate, contemporaneous and pragmatic evolutions within the various national systems of conflict of laws.”[8]  “[D]espite their differences, common law, civil law and socialist countries have all equally been affected by the movement towards the rule allowing the parties to choose the law to govern their contractual relations.”[9] Party autonomy is expressly recognized by international conventions and arbitral rules as well.[10] The European Convention on International Commercial Arbitration provides that “parties shall be free to determine, by agreement, the law to be applied by the arbitrators to the substance of the dispute.”[11] The Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL Rules”) provide that “[t]he arbitral tribunal shall apply the law designated by the parties as applicable to the substance of the dispute.”[12]  The Rules of Arbitration of the International Chamber of Commerce (“ICC Rules”) provide that “[t]he parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute.”[13]

While parties’ freedom to select an applicable law thus is well established, however, does this in fact extend to non-national rules of decision formulated by the parties themselves, which as such are not “law” in the conventional sense?  Interestingly, the authorities just quoted all refer, without exception, to “law” or “the law.”  How can this be interpreted to include rules created by the parties?  After all, it is doubtful that any national court system would itself apply as law anything but principles encompassed within some national body of law.  Will national courts actually enforce arbitral awards based on the application of rules having, in effect, no nationality whatsoever?

The remainder of this article discusses notable cases in which international arbitral tribunals have applied non-national rules of decision and lex mercatoria with nationally binding effect; and the UNIDROIT Principles of International Commercial Contracts  promulgated by the International Institute for the Unification of Private Law (“UNIDROIT”) as suitable non-national rules of decision.

[1]      The author prefers the term “non-national” to any other (such as “a-national” or “denationalized”) to describe law or rules of decision not adopted from any national corpus of law, but instead conceptually detached from any individual national body of law.

[2]      Not everyone shares the views implicit, if not fully expressed, herein as to the desirability of completely non-national rules of decision. Critics argue, for example, that trade customs or general principles alone cannot completely resolve a dispute because they leave too many issues open to interpretation by the arbitrators or to non-designated national default rules on issues such as the scope of prescription periods.  “Since national rules differ on this matter, there are no general principles, and therefore the application of customs of trade and general principles would be impossible.”  Vitek Danilowicz, The Choice of Applicable Law in International Arbitration, 9 Hastings Int’l & Comp. L. Rev. 235, 274 (1986).   Critics thus conclude that the content of non-national principles changes “as much with the arbitrator as with the industry.”  Philip J. McConnaughay, The Risks and Virtues of Lawlessness:  A “Second Look” at International Commercial Arbitration, 93 Nw. U.L. Rev. 453, 471 (1999).  “[T]ransborder, a-national regimes leave lawyers and clients at the mercy of the circumstantial creativity of [reviewing and enforcing] courts and practitioners.”  Thomas Carbonneau, Debating the Proper Role of National Law Under the New York Arbitration Convention, 6 Tul. J. Int’l & Comp. L. 277, 289 (1999).  Based on these criticisms, some commentators argue that parties should avoid the designation of non-national principles to govern contract relations.  See, e.g., Gary B. Born, International Arbitration and Forum Selection Agreements: Planning, Drafting and Enforcing 121 (1999).  The author reverts to this point later.  

[3]      Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention of 1958), June 10, 1958, 330 U.N.T.S. 38.

[4]      Karl-Heinz Böckstiegel, Public Policy and Arbitrability, in Comparative Arbitration Practice and Public Policy in Arbitration 177-78 (1986).

[5]      Karl-Heinz Böckstiegel, The Role of Party Autonomy in International Arbitration, 52-Sum Disp. Resol. J. 24 (1997).

[6]      See Born, supra note 2, at 37-71 (1999).

[7]      Böckstiegel, The Role of Party Autonomy in International Arbitration, supra note 5, at 29.

[8]      Julian D.M. Lew, Applicable Law in International Commercial Arbitration 75 (1978).

[9]      Id.

[10]    Alan Redfern & Martin Hunter, Law and Practice of International Commercial Arbitration 95-96 (3d ed. 1999).

[11]    European Convention on International Commercial Arbitration, Apr. 21, 1961, art. VII, 484 U.N.T.S. 349.

[12]    Arbitration Rules of the United Nations Commission on International Trade Law Rules [hereinafter “UNCITRAL Rules”], art. 33(1).

[13]    International Chamber of Commerce Arbitration Rules [hereinafter “ICC Rules”], art. 17(1).

The dawn of the new millennium was marked by the worldwide retreat of state authority and the concomitant privatization of functions hitherto governmental. A particularly prominent aspect of this trend has been the privatization of international commerce, including the systems for resolving disputes.