Foundation of International Commercial Arbitrations

Shaimaa Nasr Eldin

ESLSCA Business School International Business law

Foundation of the International Commercial Arbitrations
Abstract. This paper analyzes the foundation of the international commercial arbitration, as a phenomenon widely used by most of the corporations among the world as a dispute settlement mechanism. You will see that it is one of many possible procedures for the settlement of disputes in regard to economic transactions. You will learn about the essential features of arbitration; that it is for the settlement of a dispute, consensual based on the agreement of the parties, private and not part of the State system of justice and leads to a final and binding decision that will be given execution by the court. This paper also identifies the selection by the parties of the place in which their international commercial arbitration is to take place will have a fundamental impact on the determination of those rights. Equally fundamental is the parties' selection of the law, both substantive and procedural, which will apply to the determination of those rights. This paper examines both of those choices, the forum and the law applicable to the arbitration. It also identifies the three sources of rules for international commercial arbitrations. Key words: Arbitration, applicable law, source of rules for international commercial arbitrations. What is "International Commercial Arbitration" ? This term is divided into three main parts which is International, Commercial and Arbitration. Arbitration As will be seen t, it is often of great importance to know whether a given procedure amounts to “arbitration”. For example, Article II, paragraph 1 of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, generally known as the New York Convention, provides “Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration ….” Nevertheless, the Convention does not define what arbitration is. The term is rarely defined in national laws on arbitration as well. It is not defined in the UNCITRAL Model Law on International Commercial Arbitration (hereinafter the Model Law) as being “unnecessary”, although a definition had been proposed by the Secretariat. It is not so clear that the UNCITRAL Working Group really Believed that a definition of arbitration was unnecessary so much as that it Would have been difficult to formulate. For example, if a tribunal were given the authority to adapt or supplement a contract in the light of changed Circumstances, would that procedure be “arbitration”? By leaving the term undefined, just as it was undefined in the New York Convention, the borders could adjust over time to changed perspectives as to what was the proper domain of arbitration. Nevertheless, some content must be given to the term. Its principal characteristics are: - arbitration is a mechanism for the settlement of disputes; - arbitration is consensual; - arbitration is a private procedure; - arbitration leads to a final and binding determination of the rights and

obligations of the parties. - Arbitration is a mechanism for the settlement of disputes; If there is no dispute, there can be no arbitration. The issue arises most often when one party fails to pay a sum of money owed to the other, perhaps in the form of a negotiable instrument, and the debtor does not dispute the obligation. If there is an existing arbitration clause, the question arises whether the creditor can or must invoke the arbitration clause or, there being no dispute as to the existence of the obligation, the creditor can or must seek enforcement of the obligation by court action. This theoretical question can be of great practical importance if the debtor wishes to impede enforcement of the obligation and contests the appointment of the arbitral tribunal, if that is the route chosen by the claimant, or insists upon the arbitration clause, if the creditor chooses to enforce the obligation directly in the courts. The question might also arise if it appears that the parties agreed to arbitration in order to secure an enforceable award that would permit payment in the face of exchange controls that would not have permitted payment of the amount in question, absent the award. There is one common situation that has led to a generally agreed solution. In arbitration as in litigation it is common for the parties to settle their dispute after the arbitration has commenced. Once the parties have reached an agreement to settle the dispute, there is no longer any dispute for the arbitral tribunal to consider. Nevertheless, as provided in Article 30 of the Model Law1, “(1)If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal shall terminate the proceedings and, if requested by the parties and not objected to by the arbitral tribunal, record the settlement in the form of an arbitral award on agreed terms. (2)An award on agreed terms shall be made in accordance with the provisions of article 31 and shall state that it is an award. Such an award has the same status and effect as any other award on the merits of the case.” It will be noted that the arbitral tribunal may object to recording the settlement as an award. That is a form of protection to the tribunal and to the arbitral process if the tribunal believes that an award would be improper under the circumstances. Some arbitration laws do not specifically permit the tribunal to object to recording the settlement of the parties in the form of an award, though there may be other tools available to the tribunal in an appropriate case. - Arbitration is consensual; An arbitration must be founded on the agreement of the parties. Not only does this mean that they must have consented to arbitrate the dispute that has arisen between them; it also means that the authority of the arbitral tribunal is limited to that which the parties have agreed. Consequently, the award rendered by the tribunal must settle the dispute that was submitted to it and must not pronounce on any issues or other disputes that may have arisen between the parties. As provided in Article V of the New York Convention, “1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, if that party

1

UNCITRAL Model Law on International Commercial Arbitration 1985 with amendments as adopted in 2006

furnishes to the competent authority where the recognition and enforcement is sought, Proof that: ... (c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration…” - Arbitration is a private procedure; Arbitration is not part of the State system of courts. As already noted, it is a consensual procedure based on the agreement of the parties. Nevertheless, it fulfills the same function as litigation in the State court system. The end result is an award that is enforceable by the courts, usually following the same or similar procedure as the enforcement of a court judgment. Consequently, the State has an interest in the conduct of arbitration beyond the interest it has in the settlement of disputes by other procedures that are also alternatives to litigation. In the past this led some countries to exercise strict control over arbitration. In many countries the close connection between arbitration and litigation is illustrated by the fact that the law of arbitration is found in the Code of Civil Procedure.5 The current trend is to allow the parties and the arbitral tribunal full autonomy in the conduct of the proceedings subject only to the obligation found in Article 18 of the Model Law that “The parties shall be treated with equality and each party shall be given a full opportunity of presenting his case.” The courts are able to assure that the proper procedure has been followed in the arbitration by their power to set aside an award or to refuse to recognize or enforce it. Since international commercial arbitration was traditionally between two commercial companies that could have settled their dispute by negotiation or other private and confidential means, it became something of an article of faith that the private nature of arbitration also led to confidentiality. It was understood that neither the parties, arbitrators, witnesses, experts nor any supporting personnel would reveal anything about the arbitration, including its existence. There was an obvious exception if one of the parties had to invoke the aid of a court in regard to the arbitration or to set aside or enforce an arbitral award. This understanding of confidentiality has been brought into question in recent years. The impetus for change has been largely that an increasing number of arbitrations involve the State or a State entity. The issues raised in such arbitrations are often of public interest. Although it is particularly true of investment arbitrations, it may also be true of other arbitrations involving the State. A second impetus for change has been the very popularity of international commercial arbitration. Even though arbitral awards do not establish precedent in any conventional sense, there is a strong desire to know the legal determinations of arbitral tribunals in respect both of arbitral law and procedure and the substantive law governing international commercial relations. - Arbitration leads to a final and binding determination of the rights and Obligations of the parties.

Many arbitration rules, such as ICC Arbitration Rule 28(6), specifically provide that “Every Award shall be binding on the parties. By submitting the dispute to arbitration under these Rules, the parties undertake to carry out any Award without delay ….” It is not necessary for the arbitration rules governing the arbitration to say so. A procedure that does not lead to a final and binding determination of the rights and obligations of the parties is not arbitration. Most importantly, Article III of the New York Convention requires the currently 135 Contracting States to “recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon…” It is upon this foundation stone that the entire edifice of international commercial arbitration is built. Arbitration agreement is clearly defined in the United Nations Commission on International Trade Law (“UNCITRAL”) on June 21, 1985 (“Model Law”) as " an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement" Arbitration agreement shall be in writing and it is in wiring if (1) An arbitration agreement is in writing if its content is recorded in any Form, whether or not the arbitration agreement or contract has been concluded orally, by conduct, or by other means. (2) The requirement that an arbitration agreement be in writing is met by An electronic communication if the information contained therein is accessible so as to be useable for subsequent reference; “electronic communication” means any communication that the parties make by means of data Messages; “data message” means information generated, sent, received or Stored by electronic, magnetic, optical or similar means, including, but not Part One. UNCITRAL Model Law on International Commercial Arbitration 5Limited to, electronic data interchange (EDI), electronic mail, telegram, telex or telecopy. (3) Furthermore, an arbitration agreement is in writing if it is contained in an exchange of statements of claim and defense in which the existence of an agreement is alleged by one party and not denied by the other. (4 )The reference in a contract to any document containing arbitration Clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract. Commercial as stated within the international commercial arbitration act2 is given a wide interpertation so as to cover matters arising from all relatioships of a commercial nature whether contractual or not, these relationships include e following transactions: i. any trade transaction for the supply or exchange of goods or services ii. distribution agreement iii. commercial representations or agency
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International Commercial Arbitration Act, R.S.O. 1990, c.I.9. In federal legislation see the Commercial Arbitration Act, R.S.C. 1985, c.17 which adopts the Commercial Arbitration Code based on the Model Law. That code applies in relation to matters where at least one of the parties to the arbitration is Her Majesty in Right of Canada, a department or corporation or a Crown corporation, or in relation to maritime or admiralty affairs; s.5(1) of the Commercial Arbitration Act.

iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi.

factoring leasing construction of works consulting engineering licensing investment financing banking insurance exploitation agreement or concession joint venture and other forms of industrial or business cooperation and carriage of goods or passengers by air , sea, rail or road ; and

Arbitration is international as per the International Commercial Arbitration Act (“ICAA”) 3 where: i. Parties to an arbitration agreement have at the time of the conclusion of the agreement, their places of business in different states; ii. One of the following places is situated outside the state in which the parties have their places of business: a) The place of arbitration if determined in , or pursuant to , the arbitrations agreement; b) Any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject matter of the dispute is most closely connected ; or iii. The parties have expressly agreed that the subject matter of the arbitration agreement relates o more than one country. The selection by the parties of the place in which their international commercial arbitration is to take place will have a fundamental impact on the determination of those rights. Equally fundamental is the parties’ selection of the law, both substantive and procedural, which will apply to the determination of those rights. This paper examines both of those choices, the forum and the law applicable to the arbitration. The context in which the choice of forum and choice of law is made for international commercial arbitration has now been established by statute. The International Commercial Arbitration Act (“ICAA”) adopts a Model Law on international commercial arbitration adopted by the United Nations Commission on International Trade Law (“UNCITRAL”) on June 21, 1985 (“Model Law”). However, the Ontario ICAA makes a number of important changes to the Model Law, particularly in relation to the choice of law for the arbitration. The principles of choice for forum and choice of law are also well known in the Anglo-Canadian law relating to conflict of laws. Those principles have been developed over centuries by Courts to address international disputes. Accordingly, arbitrators have a whole body of case law to assist them in determining issues relating to the forum in which the arbitration is to be conducted, and the laws applicable to the arbitration. Besides the ICAA and the Model Law and the common law principles of conflict of laws, a third source of rules for international commercial arbitrations is the agreement between the parties. It is the policy of both the Courts and the legislature in Ontario that, except for limited public policy exceptions, the parties should be

held to their arbitration agreement and they should be required to resolve their disputes within the principles which they have adopted. Accordingly, the challenge with respect to the choice of law and choice of forum for international commercial arbitrations is to resolve the tension between these three sources of law: the statute/Model Law; the common law; and the parties’ agreement. These three sources will not always be consistent one with the other, and may not obviously lead to the same conclusion. Arbitration Forum The significance of the forum for the arbitration The place of the arbitration is the legal location of the proceeding. That place determines the legal setting, and the legislative and judicial framework, for the arbitration. The legal place of the arbitration need not be the physical location where the parties and the tribunal meet to conduct all or portions of the proceeding. Indeed, the arbitration proceedings may be held at any place that is appropriate, whether for consultation among members, hearing of witnesses, for the evidence of experts or the inspection of property or document. The importance of the place of the arbitration is underlined by Article 1(2) of the Model Law which states that the Law applies only if the place of arbitration is in the territory of the state. Although the word “place” is used in the Model Law and the ICAA, it has a more formal sense and for this reason the word “forum” is often used by commentators or Courts, and is used interchangeably with the word “place” in this paper. In the U.K. Arbitration Act, 19964, the word “seat” is used. While the ICAA incorporating the Model Law only apply to an international commercial arbitration which takes place in Ontario, the arbitral tribunal has, failing agreement between the parties, the right to determine the place of the arbitration. Accordingly, even though the arbitral tribunal may be formed pursuant to an order of the Court appointing one or more arbitrators, the arbitrators themselves could then decide that the place of the arbitration shall be in another jurisdiction which may eliminate the effect of the ICAA and the continuing authority of the Courts to grant remedies with respect to the arbitration. The parties to a commercial agreement may agree on arbitration to resolve their disputes, and also agree on the place where the arbitration is to be held. If they do not agree on that place in their commercial agreement, then the parties can agree on that place once a dispute arises. In the event that the parties do not so agree in either the commercial agreement or when the dispute arises, then the Model Law grants the arbitral tribunal the power to determine the place of the arbitration “having regard to the circumstances of the case, including the convenience of the parties.”7 While the arbitral tribunal may, thus, determine the place for the arbitration, the first step leading up to that process may be an application to a Court (or arbitral institution) for the appointment of one or more of the arbitrators. This
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U.K. Arbitration Act, 1996

application may be an independent one, or it may occur in response to a Court action brought by the other party. If a party to an arbitration agreement requests referral to arbitration, then in Ontario and pursuant to the ICAA, the Court must refer the parties to arbitration unless the Court finds that the arbitration agreement is “null and void, inoperative or incapable of being performed.” Other than that exception, the Court does not have the discretion to refuse to refer the parties to arbitration; “the wording of Article 8 is mandatory.” When the Court refers a dispute to arbitration, related Court proceedings are stayed. Even if the power to determine the place of the arbitration may, in some sense, be said to go to the arbitrator’s jurisdiction, the arbitrators have the power to determine that question in the first instances. The authority of the Courts to intervene is strictly limited to those circumstances contemplated in the governing legislation. If the matter arguably falls within the arbitration agreement, then a Court should not determine jurisdictional matters finally, but should refer them to the arbitration tribunal for the initial decision. Only where it is clear that the dispute is outside the terms of the arbitration agreement or that a party is not a party to the arbitration agreement or that the application is out of time should the Court reach any final determination in respect of such matters on an application to stay. If the parties have not agreed on the place where the arbitration is to take place, it will be advantageous to a party to appoint, or seek the appointment by the Court of, an arbitrator or arbitrators that work or reside in the forum preferred by that party. Since the arbitrators may reasonably conclude that they have been selected because they come from the jurisdiction considered most appropriate for the determination of the dispute, the selection of the arbitrators themselves may substantially influence the arbitrators’ selection, in turn, of the place of the arbitration. Since the choice of the place of the arbitration may affect procedural and substantive rights, as discussed below, the beginning of the process, namely, the place where a party goes to Court to require the appointment of an arbitrator or arbitrators, may be a crucial first step in the ultimate selection of the forum. Apart from the “circumstances of the case” and the “convenience of the parties”, there are no express principle in the Model Law which state how the arbitral tribunal must determine the proper place for the arbitration. However, the arbitrators are likely to look to four sources for guidance in selecting the proper place. First, many arbitrators have a legal background and in any event will be guided by the fact that the tribunal’s decisions regarding jurisdiction are reviewable by the Court. In these circumstances, a tribunal will have regard to the legal test applied by a Court when determining the tribunal’s own jurisdiction. The first source to which arbitrators will likely look to determine the proper place for the arbitration is the agreement itself from which the arbitration arises. Parties who have agreed to submit disputes to arbitration have imposed contractual obligations on themselves. Although they may not have agreed to the place for the arbitration, the other elements of their agreement may indicate the appropriate place. The second source to which arbitrators will likely look to determine the proper forum for the arbitration is the rules of procedure, if any, which the parties

chose for the arbitration. If the parties did choose the rules of procedure of a particular jurisdiction, then that jurisdiction is also likely the appropriate forum for the arbitration. For instance, if the parties to an arbitration agreement agree to have the Rules of Civil Procedure of Ontario apply to the arbitration, then that indicates that Ontario is a convenient and appropriate forum. A third source to which the arbitrators may look to determine the proper place for the arbitration is the place of the express choice of substantive law, if any, that the parties have selected to determine their dispute. Once again, the parties’ choice of law is not determinative of the place of the arbitration, but it does provide a strong indication of the intentions of the parties. If the parties do not agree to a place for the arbitration but agree to submit their dispute to an arbitral institutional, then the rules of the institution may determine the forum. For instance, if the parties agree to submit to arbitration at the British Columbia International Commercial Arbitration Centre in Vancouver, then the BCICAC International Commercial Arbitration Rules apply. Those Rules provide that the place of the arbitration is to be in Vancouver, British Columbia in the absence of an agreement by the parties or a decision by the tribunal to the contrary. If the parties select the London Court of International Commercial Arbitration (the “LCIA”), then the LCIA institutional rules will be determinative. The LCIA rules provide that in the absence of agreement to the contrary, arbitrations with the LCIA will be seated in London unless and until the LCIA Court determines that another seat is more appropriate. The impact of the forum The selection of a forum for arbitration is a significant decision for two reasons. First, the selection of a forum may be used as evidence of the parties’ intentions in cases where the parties disagree about what laws govern their agreement. Second, the legal setting of the arbitration may have an impact on the proceedings themselves. (a) Procedural Law Impact The parties’ choice of forum for the arbitration may be used to infer an intention to have the arbitral laws of the forum apply to the arbitral proceedings. This impact of the choice of forum will be particularly important in cases where the parties have not chosen the substantive laws of any jurisdiction to apply to their dispute, or have chosen the substantive laws of a jurisdiction different from the place of the arbitration. The choice of a particular forum for the arbitration may signal the parties’ intention that the arbitral laws of that forum should apply. If the parties agreed to submit their dispute to an arbitral institution then the rules of that institution may apply to determine the procedures and the forum of the arbitration and the laws that govern the substance of the agreement. (b) Substantive Law Impact The parties’ choice of forum for the arbitration may also inform the determination of the substantive law, sometimes called the “proper law” that governs the contract. If the parties to the arbitration agreement do not agree on the laws that govern the substance of the contract, but they have an arbitration agreement which selects a forum for the arbitration, Canadian Courts will normally take the substantive law of the forum as indicative of the proper law of the contract. According to the ICAA, the arbitral tribunal shall apply the rules of law that it

considers appropriate in the circumstances. Section 65 of the ICAA stipulates that this requirement applies “[d]despite Article 28(2) of the Model Law”. That latter Article stipulates that the arbitral tribunal shall “apply the law determined by the conflicts of law rules which it considers applicable”. Accordingly, the Ontario statute requires that the arbitral tribunal directly use the rules of law which it considers most applicable, not the conflicts rules contained in those rules of law, to determine the substantive law. This Ontario rule, therefore, causes the arbitral tribunal to directly select the most applicable laws, rather than being bounced from there to another set of laws by the first laws’ principles of conflict of laws. However, in deciding directly what rules of law are most applicable in the circumstances, the arbitral tribunal may well have regard to conflict of laws principles. (c) Impact on the legal setting for the arbitration The choice of a forum for arbitration is not simply a choice of where to conduct the arbitration. It is a choice about which Courts will have supervisory jurisdiction over the arbitration. The scope of a Court’s power to supervise an arbitration depends on the domestic legislation of the forum of the arbitration The importance of understanding the law regarding arbitration in a forum is illustrated by comparing the scope of judicial review available in Canada with that available in the United Kingdom. The Canadian common law is based largely on the English common law and yet the difference between the treatments of arbitration in two forums is not insignificant. Some powers are outside the authority of the arbitral tribunal and require application to the Courts. Thus, Article 27 of the Model Law permits arbitral tribunals to request the assistance of the Ontario Superior Court of Justice in compelling evidence. The Ontario Court may execute the request “within its competence and according to its rules of taking evidence”. Arbitral tribunals in Ontario do not have the power to compel evidence
6

from witnesses in other jurisdictions. In Corporation Transnational, one of the parties attempted to have the arbitral award set aside on the ground that the party’s witnesses could not provide evidence to the tribunal. The Court found that “the inability to produce one’s witnesses before an arbitral tribunal is a risk inherent in an agreement to submit to arbitration and is not a basis for setting aside an award.” There are certain legislative provisions which cannot be avoided, even by expressly contracting out of them. For instance, if parties choose Ontario as the forum for arbitration and their dispute is non-arbitrable under the laws of Ontario, the Court may refuse to enforce the agreement of the parties and may refuse to appoint arbitrators. Legislatures are free to confer exclusive jurisdiction over certain matters to the Courts. The choice of a forum for arbitration in another jurisdiction cannot “oust the jurisdiction” conferred by a legislature.

5

Section 6 of the ICAA may have been intended to avoid the application of principle of conflict of laws known as th Renvoi: Castel & Walker, Canadian Conflict of Laws, 6 ed., Chapters 5 and 31.2. There is no provision in the Federal Commercial Arbitration Act, similar to s.6 of the ICAA requiring that the arbitral tribunal directly applies to the laws which it considers applicable. Accordingly, Article 28(2) of the Model Law (or the Code as it is referred to in that federal statute) applies; requiring the arbitral tribunal to apply the law determined by the conflict of laws rules which it considers applicable.
6

Corporation Transnacional de Inversiones, S.A. de C.V. v. STET International S.p.A., 1999 Canlii 14819 (Ont. S.C.) at 50. (“Corporation Transnacional”)

In Ontario, the ICAA and the Model Law do not expressly state which provision the parties cannot contract out of. Rather, those provisions which the parties can contract out of contain words such as “unless the parties otherwise agree”.The remaining provisions are stated in mandatory form and the implication is that they are mandatory and the parties cannot agree otherwise. Generally speaking, the result is that the parties are entitled to contract out of the procedure relating to and the conduct of the arbitration, but may not contract out of the public law environment in which the arbitration is conducted, including such matters as the appointment of arbitrators by the Courts and recourse to the Courts for an enforcement by the Courts of the arbitral award. Article 4 of the Model Law confirms that there are provisions of the law from which the parties may derogate, but requires that a party must state a timely objection to such derogation, failing which that party is deemed to have waived the right to object. In the United Kingdom, the arbitration legislation contains a list of provisions of the Arbitration Act which cannot be contracted out of by the parties. By and large, those provisions reflect the same sort of mandatory provisions inferentially stated in the Model Law and incorporated into Ontario law. Accordingly, parties considering a particular place for an arbitration agreement should be familiar with the arbitral laws in that place and have regard to whether any provisions of the arbitration agreement are unenforceable in that jurisdiction. If the mandatory provisions in a jurisdiction are not satisfactory, the parties may want to consider a different forum for the arbitration. Mandatory provisions are an example of the impact that a forum can have on the rights of the parties to an arbitration agreement and they underscore the importance of understanding the law of the forum chosen for arbitration. The forum of the arbitration is also important when it comes to the enforceability of the arbitral award. Most trading countries (one hundred and fortyfour countries in total) are now signatories to the New York Convention which sets out the rules for enforceability of arbitral awards in all signatory countries. The place of the arbitration is the jurisdiction in which the arbitral award is made. Thus, the place of the arbitration is the only jurisdiction in which the Courts may annul or cancel the award. Choice of Law Parties to an international commercial contract may include in that contract a clause stating which system of laws will govern the agreement and disputes under it. The parties may also agree on such a choice of law after the dispute actually arises. In either event, the Model Law requires the arbitral tribunal to decide the dispute in accordance with the laws or rules selected by the parties. If the parties have agreed to arbitrate their dispute, but did not, in a commercial agreement or at the time that the dispute arose, agree on the law to apply to the agreement and the dispute, then that law is determined by the arbitral tribunal. As already noted, s. 6 of the ICAA requires the arbitral tribunal to apply the rules of law that it considers appropriate in the circumstances. Section 6 states that this requirement is to apply “[d]espite Article 28(2) of the Model Law”. Interestingly, s. 6 of the ICAA does not require the arbitral tribunal to apply Ontario conflict of laws rules, nor does the Model Law require the arbitral tribunal to apply conflict of laws rules of the forum of arbitration, when determining the proper law

of the agreement. Leading author on conflict of laws, Janet Walker has indicated that the conflict of laws analysis is relevant to the arbitral tribunal’s determination of the proper law to govern the agreement. However, arguably s. 6 of the Ontario ICAA may contradict that approach. In selecting and applying the substantive law, the Model Law requires that the arbitral tribunal shall do so “in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction”. In making this direction, the Model Law refers to no other facts and, as already noted, the application of the forum’s conflict of laws rules is expressly countermanded by the ICAA. Accordingly, the extent to which an arbitral tribunal governed by Ontario law may refer to Canadian conflict of laws principles is somewhat in doubt. Nevertheless, in making the selection as to which rules of law are “appropriate”, an arbitral tribunal governed by Ontario law will likely consider Canadian case law setting forth Canadian conflict of laws principles. Courts in Canada have considered a number of factors which give rise to an inference of an applicable law: Venue chosen for the arbitration Agreement by the parties as to jurisdiction Legal terminology of the agreement Form of the documents Currency of payments Language Preceding transactions Nature and location of the subject matter of the agreement Residence or headquarters of the parties

Accordingly, assuming that the arbitration takes place in Ontario and is governed by the ICAA, then absent some extraordinary facts dictating the application of other methods of selecting the “appropriate” law to govern the agreement and the dispute, the arbitral tribunal will likely have reference to these factors traditionally referred to by Canadian Courts. In choosing the “appropriate” law, the venue chosen for the arbitration is an important factor, but it will not be decisive. If all factors point to the laws of a jurisdiction other than the forum of the arbitration, then the forum of the arbitration will not dictate the applicable law. Conversely, if no other factors indicate that another jurisdiction has a closer or more substantial connection, then the forum of arbitration will be determinative. The conflict of laws concept of the inferred choice of law attempts to determine what law the parties intended to have govern their agreement. An inferred choice of law is determined by looking at factors listed above. These factors help link the agreement to a particular jurisdiction. Factors such as

terminology, currency and the form of documents may also be used to indicate the legal setting of the agreement. However, the direction in the Model Law to take into account the terms of the contract and trade usages give those sources of inferred choice greater, and arguably over-riding, importance. These factors are only relevant to the extent that they are contemporaneous with the agreement itself. Generally speaking, a choice of law cannot be inferred from actions or events that occur after the formation of the agreement. The agreement has a governing law applicable to it from the beginning, and if that choice can be inferred, then Canadian conflict of laws rules requires the arbitral tribunal to apply that law to the disputes under the agreement. In some circumstances, the factors will indicate that more than one system of laws is potentially applicable to the agreement. It may be that one or more terms of the agreement would be invalid under one of those potentially applicable systems of law. Under these circumstances, there is a presumption that the applicable law is the one under which the terms of the agreement are valid. This presumption is rebuttable if the other factors overwhelmingly indicate that an inference should be drawn that the parties actually chose the other system of laws. In Etler v. Kertesz, the court held that although the agreement was invalid under Austrian law, the laws of Austria applied to the agreement because the contract was executed in Austria and was to be substantially performed there. Where there is neither an express nor inferred choice of law, Canadian conflict of laws rules provide that the law with the closest and most real connection to the agreement shall apply. The factors to be considered in determining the law with the closest and most real connection are: The place of contracting The place of performance of the contract The place of residence or headquarters of the parties The nature of the subject of the agreement

This real connection test replaced the old maxim that, in the absence of agreement to the contrary, the law of the place of the contracting will govern the contract. Under the real connection test, any of the factors above may suggest a close connection. The place of contracting is no longer decisive. The test is flexible and allows for fact-specific case-by-case analysis. Under the real connection test, if the place of the contracting and the place of performance are the same, in all likelihood the laws of that place will have the closest and most real connection to the agreement. However, the test allows the decision-maker to consider all the circumstances. Like the inferred choice of law analysis, the real connection test is also aimed at discovering the intentions of the parties at the time of agreement. The decision-maker must determine what laws the parties, at the time they made the agreement, intended to have govern the agreement. That decision will be made by examining the agreement itself, the trade practices surrounding it and all the circumstances of the formation of the agreement.

In a similar fashion, if the parties have not selected procedural rules, then the arbitral tribunal may, subject to the provisions of the Model Law, conduct the arbitration in the manner that it considers appropriate, and a tribunal has the power to determine the admissibility, relevance, materiality and weight of any evidence. In Ontario, parties to an international arbitration agreement have the right to choose what rules of law will govern their agreement. Arbitral tribunals must decide disputes in accordance with the rules of law that the parties have chosen to apply to the substance of their dispute. The legislation does not give the arbitral tribunal the power to overrule the parties’ choice of law. Canadian Courts have consistently stated that choice of law clauses should be given effect by the Courts in all but the most unusual circumstances. However, in the case of proceedings in the Courts themselves (and not before arbitral tribunals), Courts have refused to give effect to choice of law clauses where the choice was made to evade the laws that are otherwise most closely connected to the agreement and where the application of the chosen law would be contrary to public policy. The Court’s power to overrule the parties’ choice is not exercised lightly. Even in cases where the action would not be recognized under the chosen law, the Courts have erred on the side of giving effect to the parties’ choice, even in the case of actions in the Courts themselves. Thus, in Dime Group International Inc v. Soyuz-Victan USA, the District Court of Illinois held that a choice of law (or choice of forum) clause is not unenforceable on the grounds that another jurisdiction would provide more favorable laws. The Courts have consistently promoted freedom of choice and held that the “where the parties to a contract expressly stipulate that an agreement shall be governed by a particular law, that law will generally be the proper law of the contract.” Unlike the Courts, arbitral tribunals do not have the power to overrule the choice of law of parties to an international commercial agreement under Ontario law. The Model Law requires arbitral tribunals to give effect to the parties’ choice of substantive law. If the parties include a choice of law clause in their agreement and they submit a dispute to arbitration, the arbitral tribunal will give effect to their choice and there need not necessarily be any connection at all between the contract and the law chosen to govern its substance If the law chosen by the parties to govern their dispute gives rise to an immoral result, or a result that is illegal in Ontario, then that dilemma may be dealt with at two stages of the arbitral proceeding. First, one of the parties might proceed to Court under Article 8 of the Model Law for determination as to whether the agreement is null and void, inoperative or incapable of being performed by virtue of that situation. Second, the Court may set aside the award under Article 34(b) on the grounds that the subject matter of the dispute is not capable of settlement by arbitration under Ontario and Canadian law, or is in conflict with the public policy of Ontario and Canadian law. As previously discussed, the parties may agree to the procedural rules applicable to the dispute. Often, the parties will adopt a particular arbitral regime, such as the ICC or LCIA or arbitral bodies in Vancouver or Montreal. If they do so, then the procedural rules of those regimes apply. The extent to which those rules amount to “procedure” rather than “substance” may be in dispute. Thus, the Ontario Court of Appeal has recently held that, in respect of a domestic arbitration, the rules relating to security for costs are procedural rules which, once adopted by

the parties, are enforceable and an arbitral decision implementing or enforcing those rules is not reviewable by the Court. The binding effect of choice of forum and law As we have seen, Articles 19, 20 and 28 of Model Law all require an arbitral tribunal to give effect to the choices made by the parties. Accordingly, the arbitral tribunal is given the power to determine the forum and law only where the parties have not agreed. The Courts interpret Model Law as conferring a great deal of freedom on the parties to make binding choices of forum, law and procedure. When parties agree to settle disputes through arbitration, it is the judicial and legislative policy of Ontario to “hold parties to their bargain.” The Supreme Court of Canada has also emphasized the parties’ freedom of choice: “the parties to an arbitration agreement are free, subject to any mandatory provisions by which they are bound, to choose any place, form and procedures they consider appropriate. They can choose cyberspace and establish their own rules.” The parties’ choice of forum and law is only binding, of course, if that choice is permitted to be made by the ICAA and the Model Law and if that choice is enforced by the arbitral tribunal -and the Courts. As we have seen, the parties cannot agree to change or eliminate certain core public policies relating to arbitration. However, none of those exceptions expressly refer to the choice of forum and law. Accordingly, arbitral decisions must enforce that choice by the parties, and arbitral decisions about those matters cannot be overruled by the Courts, except to the extent that they involve jurisdictional issues. If they do and those issues arise by the time of the pleading stage in the arbitration, then those issues must be raised no later than the submission of the statement of defense in the arbitration and the court may rule upon the matter, but without further appeal. Similarly, if any subsequent decisions of the arbitral tribunal relating to choice of forum or law result in an alleged jurisdictional error in the final award, then recourse against the award may, unless it was required to be raised earlier, be a ground of recourse against the award in a Court proceeding pursuant to Article 34(2) of the Model Law. Conclusion From this discussion, we can now return to the questions raised at the beginning of this paper and address how the three sources of law can be utilized to select the choice of forum and law for an international commercial arbitration. We can see that a three step process is involved. First, the choice of forum or law is almost always a matter upon which the parties can agree. Subject to their choice involving some immoral, illegal or jurisdictional issue, the parties’ choices will govern. The second ranking rules are provided by the ICAA and the Model Law. If the parties have not agreed on those matters, the Model Law provides rules for the arbitral tribunal to use in selecting the forum and law. In the case of the choice of law, the ICAA mandates a more direct selection of the choice of law than contemplated in the Model Law. The third rank of legal principles is found in the Canadian case law relating to conflict of laws. This case law cannot overrule the parties’ choices, nor can it

overrule the ICAA and the Model Law. However, the case law will assist the arbitral tribunal and the Courts to interpret and apply the parties’ agreement or to assist the arbitrators and the Courts in interpreting and applying the ICAA and the Model Law if the parties have not made that selection. While case law occupies a more supportive role, it will play a crucial, and the most dynamic, role in the development of legal principles for the selection of the forum and applicable law for the arbitration. In this process, arbitral and court decisions will not just explore the proper meaning of arbitral agreements and the Model Law. Over time, those decisions will develop the inter-relation between the parties’ agreement and the Model Law and show how all three sources of law can, in a coherent fashion, promote arbitration as a viable mechanism to resolve disputes arising from international commercial agreements.