Applicable law in contractual disputes: recent arbitration practice
It is standard practice for parties to international contracts to agree on the particular law that will apply to the contract on the basis of the principle of autonomy of the parties. Despite the simplicity of choice of law clauses, from time to time such clauses may not be interpreted unequivocally and disputes arise. The situation is aggravated by the use of standard contractual pro forma documents that may already include a choice of law clause that could conflict with the same clause in the principal contract. As recent arbitration practice at the International Commercial Arbitration Court (ICAC) at the Chamber of Commerce and Industry of Ukraine reveals, parties occasionally make a mistake in properly naming the applicable law or include too many conflicting clauses in their contract. Such occurrences may stymie an arbitral tribunal in deciding which substantive law should be applied, and in some instances the arbitral tribunal may apply a different substantive law despite the seeming initial intention of the parties.
How express should parties’ choice of applicable law be?
In one of the cases referred to ICAC for arbitration (1),the arbitral tribunal refused to apply English law on the basis that the contractual clause entitled “Governing law” contained discrepancies in the stipulation of applicable law in the bilingual contract. The contract was for the sale of several parcels of goods within different periods and was concluded between a multinational trading company (the buyer) and a Ukrainian company (the seller). The contract also incorporated provisions of a standard pro forma contract widely used in the industry.
The bilingual contract included an arbitration clause in which the parties, among other things, agreed that the law applicable to the contract should be English law. The Russian equivalent of the contractual term ‘English law’ was translated as ‘law of Great Britain’. The contract also contained a provision that the Russian language would prevail in the event of discrepancies. Alongside these provisions, the English-language standard pro forma contract that was incorporated by reference also included a choice of law clause subjecting the terms of the contract to English law.
The issues before the arbitral tribunal were:
- whether the parties made a simple mistake in translation or the discrepancy showed that there was no clear and unequivocal stipulation on the applicable law; and
- whether the clause on applicable law in the standard pro forma contract should apply.
First, the arbitral tribunal held that the ‘law of Great Britain’ does not exist as a separate legal system. The arbitral tribunal concluded that the UK legal system is unique and consists of independent legal systems – the law of England and Wales, Northern Ireland and Scotland. The arbitral tribunal found that the subjective understanding of both parties as to which applicable law had been expressly agreed was not identical. On the basis of this, it was established that no express choice of law had been made. The tribunal referred to Article 28(3) of the Law on International Commercial Arbitration, which states that in the absence of an agreed applicable law between the parties, the arbitral tribunal will decide the dispute by relying on appropriate conflict of laws rules. Pursuant to Article 32(2) of the Law on International Private Law, if parties do not agree on the applicable substantive law, the law that is most closely connected to the deal should apply.
In light of this, the arbitral tribunal held that since a discrepancy existed between the English and Russian versions of the contract and the true intention of the parties in this regard could not be established, the terms of the pro forma contract on applicable law could not satisfy the rule that the parties’ stipulation of applicable law be clear and unequivocal.
In addition, the terms of the pro forma contract stated that the:
“contract shall be deemed to have been made in England and to be performed in England, notwithstanding any contrary provision, and this contract shall be construed and take effect in accordance with the laws of England.”
As such, the arbitral tribunal held that the reference to the applicable “laws of England” should not apply, because neither party was incorporated in England; nor did the performance of the contract take place in England. However, such a finding is questionable and it appears that the tribunal confused the notion of legal domicile while ignoring the mandatory wording of this clause.
Applicable law: battle of forms?
In a different case (2),a Swiss company filed a claim with ICAC against a Ukrainian company for breach of contractual obligation to supply goods under a sale contract. The sale contract provided that the contract should be governed by Ukrainian substantive law and, as in the previous case, also incorporated a standard pro forma contract that expressly excluded the application of the United Nations Convention on Contracts for the International Sale of Goods 1980 (CISG).
The respondent objected to the application of the CISG on the basis that through the terms of the standard pro forma contract, the parties had expressly agreed that it would not apply. The claimant submitted that the CISG forms part of Ukrainian law and that its exclusion in the pro forma contract was trumped by the terms of the main contract, which should prevail over the terms of the pro forma contract.
The arbitral tribunal (comprising a sole arbitrator) concurred with the claimant. It held that pursuant to Article 9 of the Constitution and Article 19 of the Law on International Treaties, international treaties ratified by Parliament constitute a part of Ukrainian law. Ukraine has been a party to the CISG since 1991. The arbitral tribunal further held that by selecting Ukrainian law as applicable, the parties to the contract did not limit it to “internal Ukrainian law” only.
In its award, the arbitral tribunal noted that in accordance with Article 6 of the CISG, the convention would not apply if the parties to a contract expressly excluded its application. The tribunal disagreed with the respondent that the CISG had been excluded by way of the relevant clause of the pro forma contract. With reference to the United Nations Commission on International Trade Law digest on case law, the tribunal established that the exclusion of the CISG had to be express and emphasised that no terms in the main contract excluded the application of the CISG. Consequently, the arbitral tribunal found that the terms of the standard pro forma contract excluding application of the CISG conflicted with the express terms of the main contract and therefore should not be applied.
The outcome of these two arbitrations reinforces the conclusion that express terms of a contract should prevail over the terms of standard forms incorporated into the contract. If the parties wish to exclude the application of a particular treaty, clear and unequivocal wording should be used.
Parties to a contract are advised to check the wording and translation of the terms of the contract, especially as concerns the applicable law. As shown in these cases, discrepancies in translation may have consequences for the arbitration that neither party could have anticipated at the time of contracting.
(1) International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry, March 2009, Arbitral Award in Case 416u/2009.
(2) International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry, January 2012, Arbitral Award in Case 218u/2011.
Eugene Blinov, Roman Protsyshyn