Should arbitral tribunals determine applicable law as a preliminary issue?

A recent ruling of the Supreme Court of Russia took upon an interesting, even though not very common question of whether an arbitral tribunal has a duty to determine the law applicable to the merits of the case as a preliminary issue (Case No. А40-42294/2016). Usually, the parties to a cross-border contract ensure that the contract contains a clause selecting the governing law. Sometimes, however, the parties may not be diligent enough to agree on this, in which case this may become a subsequent issue.

The mentioned ruling dealt with an application to enforce an award rendered under the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry (ICAC) Rules. The judgment provides little insight into the nature of the dispute, other than that it was contractual by nature and the award was rendered in favour of the German entity. When the claimant applied for enforcement, the respondent objected that the award was contrary to Russian public policy. According to the Russian respondent, the tribunal only determined that the dispute was governed by German law in the final award and, therefore, violated the principle of party equality. It appears that the contract did not contain a choice of law clause (at least it was never mentioned) and that the respondent asked the tribunal to decide on the applicable law before proceeding to the merits phase, but this motion was dismissed.

The Russian Law on International Commercial Arbitration (as well as the ICAC Rules) provide that in the absence of an agreement between the parties, the tribunal shall apply the law determined by the conflict of laws rules which it considers applicable (Article 28(2) of the Russian Law on International Commercial Arbitration). The court concluded that there was no express duty to inform the parties about the law the tribunal purported to apply, or to rule on the applicable law as a preliminary issue. On this basis, the court ruled that there were no grounds for the refusal of enforcement.

While the pro-arbitral approach of the Russian courts should generally be praised, it does not necessarily mean that the court got it right in this case, probably because the problem was not framed correctly.

It seems to me that this is not a question of public policy and not so much a question of party equality (because at the end of the day, both parties remain unaware of the applicable law), but rather a matter of due process. It is true that the Russian Law on International Commercial Arbitration does not provide how arbitrators are to deal with a party’s request to rule on the applicable law, but this only means that it remains within the tribunal’s discretion. This discretion shall be exercised having regard to the fundamental principle of treating each party equally and allowing each party an opportunity to present its case. Naturally, knowing which law applies to the dispute in question greatly affects each party’s opportunity to present its case.

I once was involved (at a very late stage) in an arbitration where the parties were in dispute as to which law applied – German or Russian. For some reason, the arbitrator did not decide this issue before the final award. As a result, the parties were making submissions under both laws to some extent. Even though the Russian party relied primarily on Russian law, whereas the German party relied on German law, the dispute boiled down largely to factual issues between the parties. Nevertheless, I do remember thinking how inefficient it was to run the process under two potentially applicable laws, and how much easier it would have been to answer this relatively easy question at the outset of the proceedings.

From a case management perspective, I believe that a tribunal should rule on the applicable law as a preliminary issue. Certainly in situations where the parties have failed to select the applicable law and the relevant rules where the lex arbitri gives the tribunal a wide discretion in selecting which law applies. The parties could guess which way the tribunal might be leaning, but would not be certain until the tribunal says so.

Now, there are certainly many situations where there is a choice of law clause in the underlying contract and the dispute between the parties as to which law applies may look artificial. But even in this case, it is easier to introduce clarity as to the applicable law and thereby level the playing field for both parties, instead of having to constantly receive new arguments around the same issue as the case progresses. Moreover, before the tribunal looks into this issue carefully, it cannot necessarily be assumed that with a choice of law clause in a contract, a disagreement as to the applicable law is always without merits. Certainly, there could be valid arguments as to the validity and enforceability of the choice of law clause or as to which specific provisions apply to the dispute (for example, whether the national law or the Convention on the International Sale of Goods should apply to the dispute in question).

Furthermore, there could be situations where the tribunal does not need to look at the substantive provisions of the applicable law, particularly where the contract is detailed enough. Still, the applicable law sets out the rules of construction of contracts and therefore needs to be taken into account by the parties making submissions and by the tribunal when deciding on them.

Overall, as a matter of proper management, I would think that tribunals should always rule as to which law applies to the dispute, if requested by one of the parties. This should hardly cause any substantial delay in the early stages of the process, but will ensure certainty for the parties.

It is, however, a different question as to whether or not a failure to rule on the applicable law as a preliminary issue warrants refusal to enforce an award. As mentioned, this is not a matter of public policy. Also, in the absence of any specific requirement in the relevant arbitration rules or indeed the agreement of the parties, failure to rule on this issue could hardly amount to the violation of the procedure agreed by the parties.

However, in certain circumstances, this failure could deprive the party from an opportunity to present its case properly (Article V(1)(b) of the New York Convention). But this ground is always very much fact specific and requires a demonstration that a party could not have meaningfully presented its case without knowing which law applies. Arguably, two conditions should be satisfied. First, the dispute about the applicable law should be genuine, rather than just a tactical move. It is not be enough to ask the arbitrators to rule on the applicable law where there is a choice of law clause and no reasonable arguments as to why the agreed law should not apply. Secondly, the applicable law must be relevant to the issues in dispute. In other words, the losing party needs to be able to show that a different applicable law would have changed the outcome. For example, the rules of interpretation under Swiss and English law represent two extremes when it comes to taking into account the subjective intentions of the parties. Certainly, this would affect the way parties argue their case and the evidence they rely upon.

Accordingly, while the tribunal’s failure to rule on the applicable law as a preliminary issue when requested to do so by the party should not, per se, result in a refusal to enforce an award, it may in certain circumstances lead to deprivation of one of the parties of an opportunity to present its case. Therefore, it is always safer for the tribunal to grant the party’s request and to provide certainty as to the applicable law to avoid future problems.

Norton Rose Fulbright Andrey Panov

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