CHOICE OF

SUBSTANTIAL LAW

CORPUZ . DE GUZMAN. ESTIOKO. LACAP . PANGANIBAN

What instrument does best suit to
solve a transnational dispute?
Present your view.
● A fundamental principle in international arbitration is party autonomy, an
aspect of which is that the parties are free to choose the laws or rules of
law in accordance with which disputes concerning their substantive rights
and obligations will be determined.
● However, the parties do not always expressly state which laws govern the
contract in the contract documents. In the absence of subsequent
agreement and in the event a dispute arises, it will fall to the tribunal to
determine the applicable substantive law.
● The tribunal’s authority to decide choice of law issues, in the absence of
the parties’ express agreement to that effect, is contained in national
procedural laws or in the rules of the institution under which the
arbitration is conducted.
Choice of Substantive Law Under
National Arbitration Legislation in
Absence of Choice-of-Law
Agreement
TWO MAIN POINTS:

(1) Basic Choice of Law Approaches

(2)Laws Applicable to the chosen Approach
FIRST POINT: Basic Choice of Law Approaches

● Mandatory Application of Generally-Applicable Conflict

of Laws Rules of Arbitral Seat

● Mandatory Application of Specialized Conflict of Laws

Rules of Arbitral Seat

● “Applicable” or “Appropriate” Conflict of Laws Rules

Chosen by Arbitral Tribunal

● “Direct” Application of Substantive Law by Arbitral

Tribunal
Basic Choice of Law Approaches

● Mandatory Application of Generally-Applicable Conflict of

Laws Rules of Arbitral Seat
○ the law of the arbitral seat may mandatorily require
arbitrators to apply generally-applicable local conflict of
laws rules or local substantive law.
● Mandatory Application of Specialized Conflict of Laws Rules of
Arbitral Seat
○ some legislation imposes specialized choice-of-law rules on
arbitral tribunals seated within national territory
Basic Choice of Law Approaches
● “Applicable” or “Appropriate” Conflict of Laws Rules Chosen
by Arbitral Tribunal
○ some statutes authorize arbitrators to apply the choice-of-
law rules they consider “applicable” or “appropriate.”
● “Direct” Application of Substantive Law by Arbitral Tribunal
○ some legislation grants tribunals the power “directly” to
apply whatever substantive rules of law they consider
appropriate, without applying conflict of laws rules.
Basic Choice of Law Approaches

● Mandatory Law Rules

○ a nation’s law may dictate that particular claims or

defenses must be heard by the arbitrator under
mandatory national law.
Assessment:
Voie Directe vs. Voie Indirecte

● Voie Directe / “Direct” Application of Substantive Law by

Arbitral Tribunal

○ known as the “direct application” method

○ It involves the tribunal determining choice of law issues by

directly applying a particular law or rules of law

● Voie Indirecte / “Applicable” or “Appropriate” Conflict of Laws

Rules Chosen by Arbitral Tribunal

○ involves the tribunal determining the choice of law rules to

apply to the dispute, and then determining the applicable
law or rules of law by the application of the choice of law
rules.
Voie Directe / “Direct” Application of Substantive Law by
Arbitral Tribunal

● Where the applicable lex arbitri or institutional rules provide for a voie
directe approach, the power vests in the tribunal to select the
appropriate law, or rules of law applicable to the merits of the dispute
directly.

● Using this method, the tribunal may consider elements such as the
contract, the circumstances of the case and the submissions of the
parties.

● When using the direct application method, the arbitral tribunal should
determine the law most relevant to the commercial circumstances of the
case, that is, the law or rules of law which best suit the international
transaction, taking into account the circumstances of each case.
Voie Directe / “Direct” Application of Substantive Law by
Arbitral Tribunal
● EXAMPLE:

○ A widely acclaimed example of the application of the voie

directe approach is the French Code of Civil Procedure,
which provides in its Art 1511 that where no choice of law
has been made, the arbitral tribunal should render its award
“in accordance with the rules of law it considers
appropriate”.
Voie Indirecte / “Applicable” or “Appropriate” Conflict of Laws
Rules Chosen by Arbitral Tribunal

● The voie indirecte method limits the tribunal’s power to the

determination of the appropriate conflict of laws rule, which is
then applied to determine the appropriate substantive law

● The terms of the instrument or rules from which the tribunal’s

power is derived may give the tribunal a discretion to apply the
conflicts rule it considers “applicable” or “appropriate”

● Or, the instrument may prescribe how the conflicts rule is to be

ascertained
Voie Indirecte / “Applicable” or “Appropriate” Conflict of Laws
Rules Chosen by Arbitral Tribunal
● EXAMPLES:

○ An example of the voie indirecte approach can be found in s

46(3) of the English Arbitration Act 1996,10 providing that
in the case of no agreement of the parties on the applicable
law to the merits of the dispute, “the tribunal shall apply the
law determined by the conflict of laws rules which it
considers applicable”.

○ Article 32(2) of the Singapore Arbitration Act11 provides

that “if or to the extent that the parties have not chosen the
law applicable to the substance of their dispute, the arbitral
tribunal shall apply the law determined by the conflict of
ANSWER TO WHAT IS THE BEST APPROACH TO SOLVE A
TRANSNATIONAL DISPUTE?

“Direct” Application of Substantive Law by Arbitral Tribunal

WHY?
● International Arbitration = Party Autonomy
● Since the parties chose the institutional tribunal to best solve the
dispute, the power given to arbitrators to choose the substantive
law applicable to the dispute is not in conflict with their intention
to arbitrate.
Choice of Substantive Law Under
Institutional Arbitration Rules in
Absence of Choice-of-Law
Agreement
Choice-of-Law Rules Applied by Arbitral Tribunals in
Absence of Choice-of-Law Agreement

● Choice-of-Law Rules of Arbitral Seat

● Choice-of-Law Rules That Arbitral Tribunal Considers “Appropriate”

● “Cumulative” Application of Choice-of-Law Rules

○ this “cumulative” approach virtually always concludes that all potentially

relevant conflicts rules select the same law.

● Application of Substantive Law of State With Closest Connection to Dispute

● Choice-of-Law Rules of State With Closest Connection to Underlying Dispute

● “International” Choice-of-Law Rules

○ Some arbitral decisions derive choice-of-law rules from non-national

SECOND POINT: LAW APPLICABLE TO THE
CHOSEN APPROACH
● Application of Substantive Law of State With Closest Connection to Dispute

○ Some national legislation and institutional rules require tribunals to apply

the conflict of law rules of the State that they consider to be most closely
connected to the dispute.

○ The closest-connection-test, which is one of the most central concepts of

private international law, is frequently applied by arbitral tribunals in the
process of identifying an applicable law. The arbitrators look at relevant
connecting factors and seek to identify the law with the closest connection
to the transaction in question. This law will then be applied.
SECOND POINT: LAW APPLICABLE TO THE
CHOSEN APPROACH
● Application of Substantive Law of State With Closest Connection to Dispute

○ Even where the tribunal is not required to apply the closest connection
test, some tribunals have considered that this test is a transnational
principle of private international law and have gone on to apply it as the
most appropriate conflicts rule to determine the substantive law.

○ This method appeals to the notion that the law will be tailor-made for the
particular contractual circumstance.
ANSWER TO WHAT IS THE BEST INSTRUMENT TO SOLVE A
TRANSNATIONAL DISPUTE?

Application of Substantive Law of State With Closest Connection to Dispute

WHY?
● When applying the closest-connection-test the arbitrators decides which connecting factors
that are relevant and how much weight they should be given. It is true that a rule which relies
on the discretion of the arbitrators opens up for uncertainty.

● However, an application of the test is not fully arbitrary or random. Contrary to existing legal
provisions which grant the arbitrators the full freedom to apply conflict rules they deem
“appropriate” or “applicable”, the closest- connection-test obliges the arbitrators to consider
certain connection factors.

● Therefore, if the test is applied to determine which system of private international law govern
party autonomy the parties will at least be given a just opportunity to make a reasonable
BEST INSTRUMENT FOR TRANSNATIONAL
DISPUTE

● To use the DIRECT APPLICATION OF SUBSTANTIVE LAW BY

THE TRIBUNAL and applying the LAWS WITH CLOSEST
CONNECTION TO THE DISPUTE
CONCLUSION

● Party autonomy gives the parties the freedom to choose which

law shall govern their contractual relationship. It is a conflict
rule designating an applicable law.

● There is no uniform practice in respect of the application of

conflict rules in international commercial arbitration.

● The only thing one can be sure of is that the arbitral tribunal will
apply the universal principle of party autonomy to determine
which substantive rules of law to apply.
CONCLUSION

● It is advisable that the parties make a clear choice of substantive law when entering into
an arbitration agreement as the chosen law sets the legal standards for the parties’
contractual relationship.

● Knowing the applicable law will make it easier to analyze the risks arising from the
contract and is therefore crucial when evaluating whether or not to commence an
arbitral proceeding.

● If the parties not choose an applicable law, it is the arbitrator's’ task to identify one. This
can be done directly or through the application of private international law.

● It is necessary, or at least preferable, that the arbitrators and the parties in advance know
which system of private international law governs party autonomy. Knowing only which
single conflict rule that applies does not provide for a satisfactory solution. It is therefore
advisable that a universal rule is adopted which designates which system of private
international law applies.