The arbitration
agreement is the formal expression of the parties’ common intention to settle
the disputes arising out of the contract through arbitration and is the primary
source of the power of the arbitral tribunal. All international commercial
contracts generally encompass the following phrase ‘all disputes arising out of or in connection with this contract’ to
empower the parties to the contract a reference of the dispute to arbitration.
Based on the law governing the arbitration agreement containing the
above-mentioned phrase, the arbitral tribunal may construe the agreement
liberally or strictly to either include or exclude the dispute of adaptation of
the contract from the scope of the arbitration agreement.
In order to
determine the scope of the arbitration agreement, the arbitral tribunal while
interpreting the agreement first applies the general principles applicable to
contractual interpretation.[1] In the context of change in
circumstances requiring adaptation of the contract, the arbitrators are
generally reluctant in adapting the contract because the decision of the
arbitrator results in creating a substantially different contract from the one
that was entered between the parties.[2] More importantly, the
‘pro-arbitration’ principle has played a significant role in expanding the
arbitrability of disputes by the arbitrators. The pro-arbitration presumption
stipulates that in case of doubts with regard to the arbitrability of disputes
by the arbitral tribunal, the arbitrators must resolve the ambiguity in favour
of arbitration. This presumption has been accepted in a number of jurisdictions
derived from the policies of international conventions relating to arbitration.[3]
The
justification underlying the presumption of pro-arbitration is that once the
parties have agreed to have their ‘disputes
arising out of the contract through arbitration, it is reasonable to settle
all the disputes relating to the same contract be resolved in a single forum,
that is, arbitration. The United States applies the presumption without
discriminating between the ‘broad’ or ‘narrow’ arbitration clause.[4] In the seminal case of Fiona Trust,[5] the English court held as
follows:
“The proposition that any jurisdiction or arbitration clause in
an international commercial contract should be liberally construed promotes
legal certainty. It serves to underline the golden rule that if the parties
wish to have issues as to the validity of their contract decided by one
tribunal and issues as to its meaning and performance decided by another, they
must say so expressly. Otherwise, they will be taken to have agreed on a single
tribunal for the resolution of all such disputes.”[6]
Though the
scope of the arbitration agreement is restricted by the principle of party
autonomy, it is argued by Prof. Gary B. Born that it is appropriate to adopt
principles that construe the scope of international arbitration agreements in
favour of arbitration.[7] Based on the wording of the
arbitration agreement, the courts in various jurisdictions have attached
different construction to the scope of the arbitration agreement. A significant
number of jurisdictions have construed the scope of an arbitration agreement
with the widest amplitude and content. Moreover, in cases involving long-term
contracts containing the ICC Model Arbitration Clause along with a number of
other provisions requiring modification over a period of time, the tribunal
presided over by Lord Wilberforce has construed the arbitration agreement to
include the power to adapt the contract.[8] This can be achieved by
applying the rule of reading the contract as a whole for the purpose of
construction of the contract, and every provision of the contract will be red
in reference to the other provisions contained in the same contract.[9] In cases where the parties
have covered provisions regarding modifications of the contract but not
included any provision with regard to change in circumstances, it is reasonable
to construe the contract to have implied authorized the arbitrator to adapt the
contract within the scope of the arbitration agreement. In an absence of such
implied power enunciated in the arbitration agreement, the next source of the
arbitrator’s power to adapt the contract is the law governing the arbitration
or lex arbitri.
LAW GOVERNING THE ARBITRATION
OR LEX ARBITRI
If the
contractual provisions are silent on the power of the arbitral tribunal to
adapt or modify the contract to the changed circumstances and so is the
arbitration agreement, then the lex
arbitri can determine such power of the arbitral tribunal. The law
applicable in arbitration is
completely different from the law applicable to arbitration[10] and the lex arbitri deals with the latter. The lex arbitri deals not only with the regulation of the arbitration
proceedings but also with non-procedural matters, for instance, the question of
arbitrability[11], such as in the current
consideration. The identification of the lex
arbitri applicable to the dispute follows the same procedure that is
employed in determining the law governing the arbitration agreement.[12] While exercising the power
under the applicable lex arbitri the
arbitrators should be careful, if no authority exists within the law of
arbitration, the final award may be set aside under New York Convention.[13] However, only a trifling
number of national legal systems contain express provisions with regard to
adaptation or supplementation of contract by the arbitral tribunal.
The Dutch Code of Civil Procedure under Article 1020 (4) (c) allows the
parties to the contract to submit the dispute with regards to contractual
adaptation to arbitration in case of change in circumstances. The provision is reflected in Art. 258 of Book 6 of the Dutch Civil Code is liberal and the threshold
that must be met for invoking the provision of contractual modification is that
of “reasonableness and fairness”, contrary to the “excessive” onerousness
criteria reflected in Unidroit Principles.[14] Similarly, the Egyptian
Civil Code[15] stipulates that if
exceptional circumstances occur which could not have been foreseen by the
parties at the time of conclusion of the contract, then the judge can adapt the
contract in order to balance the obligation in the interest of both the
parties.[16] Likewise, the Swedish Arbitration Act, 1999[17] allows the parties to the
contract to authorize the arbitral tribunal to supplement the contract beyond
the construction of the contract. In order to ease the excessive burden imposed
on one of the parties to the contract, the Peruvian Civil Code[18] allows the parties to refer
the matter to the court for adaptation in the event of a change of
circumstances.
Moreover, the
power of the arbitrator is a corollary to the power of the courts in this
regard. This is expressed in the
principle of synchronized competencies. According to this the power of the
arbitral tribunal is placed on equal footing with that of the power of the
jurisdictional courts.[19] In this regard, in order to
determine the power of the arbitrator to adapt the contract, one has to assess
the competence of the domestic courts to modify the contract in event of a
change of circumstances.[20] However, it must be
remembered that the power of the arbitral tribunal is wider than the general
powers conferred on the competent court and this is reflected in the principle
which allows the arbitrators to decide case ex
aequo et bono or as amiable
compositeur.[21] In the absence of any such
power to adapt the contract under the applicable procedural law agreed by the
parties or as determined to be applicable under the test laid down above, the
arbitral tribunal may refer to the substantive law of that jurisdiction to
determine the applicable power to adapt the contract. For instance, there is no
express authorization to adapt the contract in the event of changed
circumstances under the procedural law of Germany, but the substantive law,
that is, Section
317 of the German Civil Code, authorizes the courts to adapt the contract in case the
parties fail to determine the modus
of contractual adaptation.[22]
If, however,
both the substantive and procedural law applicable is silent on the power of
the court or arbitral tribunal to adapt the contract, the authority to adapt
the contract in the event of changed circumstances can be judged according to
the law applicable to the contract, that is, the lex causae.[23]
LEX CAUSAE (LAW
APPLICABLE TO THE CONTRACT)
In the absence
of an express choice of law governing the arbitration agreement, the generally
accepted principle is to apply the law that governs the rest of the contract.[24] The rationale behind this is
that, since the arbitration agreement is one of the multiple provisions
contained in the contract, the law that generally applies to the contract, as
chosen by the parties, is to be made applicable to the arbitration agreement.
However, the doctrine of separability of the contract has been identified as a
general impediment in considering the notion that the law governing the
underlying contract should also govern the arbitration agreement. According to
the doctrine of severability of the arbitration agreement, the arbitration
agreement though contained in the same contract is a separate agreement that
can stand alone in the event of a challenge to the validity of the underlying
contract. The primary consequence of the doctrine of severability of the
arbitration agreement from the underlying contract is the possibility of a
different law governing the arbitration agreement as against the law governing
the underlying contract.[25]
In the context
of international commercial contracts, the parties generally agree to govern
the substantive obligations of the contract by accepted international principles
such as the Unidroit Principles or PECL or CISG. The substantive standard of
contractual adaptation is governed by the lex
causae of the contract.[26] The accepted governing law
of the contract can necessarily be applied in order to determine the adaptation
of the contract within the limits of applicable mandatory rules of the law
applicable to the contract.[27]
In this regard,
while demarcating the law governing the substantive obligation and the law
governing the procedural aspects of the arbitration, the arbitrator's power to
perform a specific function can be determined according to the applicable laws,
thus the power is implied either from the lex
arbitri or lex causae.
[1] Gary supra note
83, at 1063.
[2] ICC Partial Award No. 7544 (1995), [1999] J. D.
I. 1062.
[3] Gary supra note
83, at 1067.
[4] See, e.g., Chevron
U.S.A., Inc. v. Consolidated Edison Co., 872 F. 2d 534, 537-38 (2d Cir. 1989)
(United States of America); Advanstar Comm. Inc., v. Beckley-Cardy, Inc. 1994
W. L. 176981, at 3*(S. D. N. Y. 1994) (United States of America).
[5] Fiona Trust & Holding Corp. v. Privalov,
[2007] U. K. H. L. 40 (United Kingdom).
[6] Id.
[7] Gary supra note
83, at 1081.
[8] Berger, supra
note 11, at 8.
[9] Westmoreland Coal Co. v. Entech, Inc., 100 N. Y.
2d 352, 358 (2003) (United States of America).
[10] Jan Paulsson, Arbitration
in Three Dimensions, 60 I. C. L. Q. 291 (2011).
[11] Alastair Henderson, Lex Arbitri, Procedural Law and the Seat of Arbitration, 26 S. Ac.
L. J. 886, 887 (2014).
[12] Supra, ¶2.2,
p. 24.
[13] Berger, supra
note 11, at 10.
[14] Frederick R. Fucci, Hardship and Changed Circumstances as Excuse for Non-performance of
Contracts: Practical Considerations in International Infrastructure Investment
and Finance, April 2006, available at
https://files.arnoldporter.com/hardship_excuse_article.pdf (Last visited
February 4, 2020).
[15] The Egyptian Civil Code, Art. 147 (2)
[16] Pascale, supra
note 42, at 46.
[17] The Swedish Arbitration Act, 1999, paragraph
1(2).
[18] The Peruvian Civil Code, Art. 1440
[19] P. Sander, International Encyclopedia of
Comparative Law, Vol. 16 70 (2014).
[20] Charles H. Brower II, Mind the Gap, 2016 BYU L. Rev. 1 (2016), at 18.
[21] Julián Bordacahar, The Rule of Law As Created by Arbitrators – An Update on the
Discussions At The Recent IBA Arbitration Day in Buenos Aires, Kluwer
Arbitration Blog, April 8 2018, available at
http://arbitrationblog.kluwerarbitration.com/2018/04/08/iba-buenos-aires-report/
(Last visited February 5, 2020).
[22] Berger, supra
note 11, at 11.
[23] See Konrad
Zweigert/von Hoffman, Bernd, Zum internationalen Joint-Venture, in: Festschrift
Martin Luther, 203, 211 (1976).
[24] Channel Tunnel Group Ltd. v. Balfour Beatty
Construction Ltd [1993] A. C. 334 (United Kingdom).
[25] Nigel supra
note 66, at 159 ¶3.13.
[26] Berger, supra
note 11, at 11.
[27] See UN Doc. A/CN.9/WG. II/WP.44, ¶30.