Which law should apply?

Given the contractual basis of arbitration, one may take the view
that it should be the law "10"applicable to the agreement from which the arbitrators derive
their powers.(7) In France, private international law traditionally favors this analysis, but it
also recognizes the judicial nature of the arbitrator's role, which could conceivably cause the
law of the seat of the arbitration to apply. The law of the seat is favored by those who
traditionally think of arbitration as a judicial process to be assimilated with court
litigation.(8) The weakness of such a position is that it is somewhat circular, but the law of
the seat of the arbitration nevertheless has the advantage, in some cases, of being more
predictable than the law governing the arbitration agreement (38. Fouchard, p. 5)

41. – As a result, it may well be fair for a third party instructed to implement an adaptation
mechanism to consider that there is a dispute between the parties, where those parties cannot
agree either as to the principle that adaptation is required because of hardship, or as to the
extent of such adaptation.

In practice, when the contract contains an arbitration clause and arbitrators are asked to give
effect to a hardship clause, they consider there to be a dispute and they will therefore
interpret or apply the disputed clause.(101) This is a common sense approach, and it reflects
the solution generally favored by legal commentators.(102)

The only question which may arise is whether the parties did actually confer a power of
adaptation on the arbitrators. This is a matter of interpretation of the parties' common
intention. If such an intention does exist, one has to accept both that it is legitimate, and that
there is nothing improper about calling the intended procedure arbitration. After all, in such
cases the arbitrators will be required to determine which of the conflicting positions is well-
founded, and therefore to resolve a dispute.

42. – These practical considerations led the 1986 Netherlands Arbitration Act to allow
parties to agree to have their contracts adapted by arbitrators. According to Article 1020,
paragraph 4 of the Code of Civil Procedure(103)

[p]arties may also agree to submit the following matters to arbitration:

...

(c) the filling of gaps in, or modification of, the legal relationship between the parties."28"

43. – The position of French law in this respect has become less restrictive, as can be seen
from an important decision concerning an “escape clause”in contracts for the supply of fuel-
oil which provided that the parties would meet to adapt the price to new circumstances. The
Paris Court of Appeals referred the parties to an “observer”so that they might reach
agreement on the basis of principles determined by the observer, failing which the Court
reserved the right to fix the new price.(104) Whatever a court, bound by the principle of the
intangibility of contracts,(105) can do to give full effect to the parties' intentions, can also be
done by international arbitrators.(106) The Paris Court of Appeals had already implicitly
adopted this view by not querying the arbitral status of an award submitted to it for review,
where the arbitrators held that the conditions triggering the operation of a hardship clause
and permitting the adaptation of the contract were satisfied.(107) Nowadays, commentators
are largely in favor of arbitrators being empowered, in French law, to adapt a contract.(108)
(38. Fouchard, p. 11)

3° The Completion or Adaptation of Contracts

(…) Long-term international contracts sometimes contain a clause providing for

modification of the contract in the event that, following a change of economic, technical or
other circumstances, there is a serious imbalance in the parties' reciprocal undertakings. The
existence of such hardship will then lead to renegotiation of the contract and, if this
renegotiation fails, a third party will be required to determine whether the contractual
conditions triggering modification of the contract have been satisfied and, if they have,
to carry out that modification.(82) International contracts may also contain mechanisms
which, in cases of frustration (in the common law sense of the word) or force majeure
(construed more broadly than in civil law systems), suspend, modify or terminate the
contract, and which may require the intervention of a third party to do so.(83)"24"

34. – Strictly speaking, “the fixing of a price by third parties does not, in principle,
constitute a judicial act:”(84) there is no “dispute”or, more precisely, there is neither a prior
“claim”by one party, nor an assessment of that claim by a third party. Such factors would be
characteristic of a judicial act and therefore also of the role of an arbitrator. The latter could
not, in that capacity, be required to extend or modify a contract.

However, this narrow interpretation of the arbitrator's role does not reflect the practice or
indeed the current needs of international trade. The issue has been debated extensively by
practitioners(85) and has been the subject of numerous arbitral awards over the past thirty
years. In fact, there are two aspects to the question, depending on whether or not the contract
submitted to the arbitrator contains a specific hardship clause.

b) Where the Contract Contains a Hardship Clause

38. – The situation is different where the parties have agreed that the contract may be
supplemented or adapted to reflect changes in circumstances, and have also inserted an
arbitration clause. Are the arbitrators entitled to make such alterations if the parties fail to
reach a consensus?"26"

On the theoretical grounds discussed above some commentators considered the answer to be
in the negative, arguing that an arbitral award is a judicial act and that the role of an
arbitrator, a private judge, does not include performance of an “exclusively creative act.”(94)

39. – These reservations were mainly raised in France, and generally related to the initial
determination by a third party of the price of goods, which Article 1592 of the French Civil
Code inaccurately describes as an “arbitration.”(95) Other legal systems, such as that of the
United States, were more inclined to take a broad view of the arbitrators' powers, provided
they originated in the common intention of the parties.(96)

40. – With these potential difficulties in mind, in 1978 the ICC produced rules specifically
regarding the adaptation of contracts.(97) There were concerns that such a role might not be
compatible, in some legal systems, with the definition of arbitration, and the rules therefore
provided for the appointment of a “third party,”who would make either a recommendation or
a decision. In the latter case, the rules specified that the “decision is binding on the parties to
the same extent as the contract in which it is deemed to be incorporated. The parties agree to
give effect to such a decision as if it were the expression of their own will”(Art. 11). The
ICC thus deliberately opted to confer contractual status on the decision of the third party,
who acted as the parties' agent, instructed by the parties, jointly, to complete or adapt the
contract as they could have done directly. However, the intervention of this third party was
governed by procedural rules involving a contentious hearing,(98) and the third party's
decision could assume a different status if a court hearing an application to enforce it
considered that the third party had in fact resolved a dispute.

This issue will no longer arise, as the rules in question were withdrawn by the ICC in 1994
because, in more than fifteen years, they had never been used. The reasons for this lack of
success(99) include a wariness among practitioners, who tended to favor the pacta
sunt"27"servanda principle, competition from other methods of dispute resolution,(100) and
the dangers of a contractual decision with no recourse.

There is another lesson to be learned from the failure of the rules: any distinction between
so-called contractual arbitration and judicial arbitration is extremely tenuous. It is therefore
preferable, both for theoretical and practical reasons, to define arbitration relatively broadly,
at least as far as the adaptation of contracts is concerned.

41. – As a result, it may well be fair for a third party instructed to implement an adaptation
mechanism to consider that there is a dispute between the parties, where those parties cannot
agree either as to the principle that adaptation is required because of hardship, or as to the
extent of such adaptation.

In practice, when the contract contains an arbitration clause and arbitrators are asked to give
effect to a hardship clause, they consider there to be a dispute and they will therefore
interpret or apply the disputed clause.(101) This is a common sense approach, and it reflects
the solution generally favored by legal commentators.(102)

The only question which may arise is whether the parties did actually confer a power of
adaptation on the arbitrators. This is a matter of interpretation of the parties' common
intention. If such an intention does exist, one has to accept both that it is legitimate, and that
there is nothing improper about calling the intended procedure arbitration. After all, in such
cases the arbitrators will be required to determine which of the conflicting positions is well-
founded, and therefore to resolve a dispute.

42. – These practical considerations led the 1986 Netherlands Arbitration Act to allow
parties to agree to have their contracts adapted by arbitrators. According to Article 1020,
paragraph 4 of the Code of Civil Procedure(103)

[p]arties may also agree to submit the following matters to arbitration:

...

(c) the filling of gaps in, or modification of, the legal relationship between the parties."28"

43. – The position of French law in this respect has become less restrictive, as can be seen
from an important decision concerning an “escape clause”in contracts for the supply of fuel-
oil which provided that the parties would meet to adapt the price to new circumstances. The
Paris Court of Appeals referred the parties to an “observer”so that they might reach
agreement on the basis of principles determined by the observer, failing which the Court
reserved the right to fix the new price.(104) Whatever a court, bound by the principle of the
intangibility of contracts,(105) can do to give full effect to the parties' intentions, can also be
done by international arbitrators.(106) The Paris Court of Appeals had already implicitly
adopted this view by not querying the arbitral status of an award submitted to it for review,
where the arbitrators held that the conditions triggering the operation of a hardship clause
and permitting the adaptation of the contract were satisfied.(107) Nowadays, commentators
are largely in favor of arbitrators being empowered, in French law, to adapt a contract.(108)
(38. Fouchard, p. 45-46)

(v). Powers conferred by the arbitration agreement

1.58 An arbitration agreement does not merely serve to establish the obligation to arbitrate, but is also
a basic source of the powers of the arbitral tribunal. In principle, and within the limits of public policy,
an arbitral tribunal may exercise such powers as the parties are entitled to confer and do confer upon
it, whether expressly or by implication, together with any additional or supplementary powers that may
be conferred by the law governing the arbitration.(66) Parties to an arbitration are masters of the
arbitral process to an extent impossible in proceedings in a court of law. Thus, for example (and with
limits that will be considered later), the parties may determine the number of arbitrators on the arbitral
tribunal, how this tribunal is to be appointed, in what country it should sit, what powers it should
possess, and what procedure it should follow.

1.59 The ‘agreement to arbitrate’ also establishes the jurisdiction of

the arbitral tribunal. In the ordinary legal process whereby disputes

are resolved through the public courts, the jurisdiction of the relevant

court may come from several sources. An agreement by the parties

to submit to the jurisdiction will be only one of those sources.

Indeed, a defendant will often find itself in court against its will. In the

arbitral process, the jurisdiction of the arbitral tribunal is derived

simply and solely from the express or implied consent of the parties.
 JURISDICTION VS POWERS OF THE ARBITRAL TRIBUNAL

Redfern/Hunter Chapter 5

5.02: The powers, duties, and jurisdiction of an arbitral tribunal arise from a complex mixture
of the will of the parties, the law governing the arbitration agreement, the law of the place of
arbitration [Lord McNair, ‘The general principles of law recognised by civilised nations’
(1957) 33 BYIL 1, at 7], and the law of the place in which recognition or enforcement of the
award may be sought.

5.05 The powers and duties of an arbitral tribunal are also closely linked to the question of its
jurisdiction (particularly in defining the extent of that jurisdiction) and the difficult question
of determining the validity of the arbitration agreement.

5.06 The powers of an arbitral tribunal are those conferred upon it by the parties within the
limits allowed by the applicable law [Lew, n. 5, at 143 (emphasis added). It could also be
seen as an express choice, if the arbitration clause is considered to be simply one of the
rights and obligations assumed by the parties in their contract, to be governed by the law
which governs that contract], together with any additional powers that may be conferred
automatically by operation of law. These powers are established to enable the arbitral tribunal
to carry out its task properly and effectively.

POWERS

Sources of arbitrators’ powers:

1. powers conferred by the parties

5.08 The parties may confer powers upon the arbitral tribunal

a. directly (A ‘direct’ conferment of powers takes place when the parties agree expressly upon the
powers that they wish the arbitrators to exercise, possibly by setting them out in the terms of
appointment or a submission agreement. )  not our case

b. indirectly (An ‘indirect’ conferment of powers takes place when the parties have agreed that the
arbitration is to be conducted according to pre-established rules of arbitration that set out the powers
of the tribunal)  HKIAC rules

but only within the limits of the applicable law. Any excess of power (that is, any power
granted over and above that allowed by the applicable law) is invalid, even if it is contained
in international or institutional rules of arbitration.

5.13 It is consequently not enough simply to refer to the arbitration agreement (including any
institutional or international rules that may be incorporated within that agreement) in order to
determine the powers of the arbitral tribunal; any relevant mandatory provisions of the law governing
the arbitration agreement, and of the law governing the arbitration, must also be taken into account.

5.14 In practice, the best approach when considering the powers of an arbitral tribunal is to look first
at the arbitration agreement (including any applicable rules), then at the law governing the arbitration
agreement, and finally at the law governing the arbitration (if different). The arbitration agreement
should be considered to establish what powers the parties themselves have agreed to confer on the
arbitral tribunal. In general, those powers are set out in the rules to which the arbitration has been
subjected. The law governing the arbitration agreement should then be considered to identify how
those powers may have been supplemented or restricted. The law of the arbitration agreement, which
governs its validity, effect, and interpretation, may confer specific powers (or impose certain
limitations) upon the arbitral tribunal.(14) Finally, if different, the law governing the arbitration itself, the
lex arbitri, should be similarly considered.

Common powers of the AT: determining the applicable law and the seat

JURISDICTION

5.91 An arbitral tribunal may validly resolve only those disputes that the parties have agreed
that it should resolve. This rule is an inevitable and proper consequence of the voluntary nature of
arbitration. It is the parties who give to a private tribunal the authority to decide disputes between
them, and the arbitral tribunal must take care to stay within the terms of its mandate. The rule to this
effect is expressed in several different ways. (…) Another way of expressing the rule (which is
followed in this volume) is to state that an arbitral tribunal must not exceed its jurisdiction (this
term being used in the sense of mandate, competence, or authority).

CL

- under the law of Danubia arbitration agreements have to be interpreted narrowly and in
accordance with the parol evidence rule (NoA, par 15)
- the Arbitration Law of Mediterraneo provides for a broad interpretation of arbitration
agreements, irrespective of an allegedly narrow wording merely referring to “dispute(s)
arising out of this contract”

RE

- the law of Danubia which recognizes that arbitrators may adapt contracts but requires an
express empowerment for that. Such an express conferral of powers is, however, missing
in the present contract (ANoA, par. 13)
- Under Danubian law, as well as under all other potentially relevant arbitration laws the
arbitration agreement is considered to be a legally separate agreement from the container
contract in which it is included. That is clearly recognized by Article 16 of the Danubian
Arbitration law as well as the identically worded Article 16 of the Mediterranean
Arbitration Law which both explicitly acknowledge the doctrine of separability. Thus, the
reference in the choice of law clause directly preceding the arbitration clause that “this
Sales Agreement is governed by the law of Mediterraneo” (emphasis added) is merely
determining the law applicable for the main contract, i.e. the “Sales” part of it. It does
not refer to the following arbitration clause and can also not be interpreted as an implicit
choice for the arbitration agreement. (ANoA, par 12)
- Danubian law adheres for the interpretation of contracts including arbitration
agreements to the “four corners rule”, i.e. that the interpretation of the arbitration
agreement is limited to its wording and no external evidence may be relied upon. In
particular, reliance on the drafting history and preceding communication is excluded if
the wording is clear.