Wednesday, April 15, 2009

applicable law in arbitration


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THE APPLICABLE LAW GOVERNING
ARBITRATION PROCEEDINGS
Abstract
Makalah ini mendiskusikan tentang hukum yang akan digunakan dalam proses beracara di arbitrase, bagaimanakah cara menentukannya dan bagaimana pula hukum internasional mengatur mengenai hal ini. Walaupun sudah ada pengaturan umum ini dimana terdapat teori lex arbitri is lec loci arbitri, namun adalah sangat menarik untuk membahas bagaimana Indonesia mengatur hukum yang akan digunakan dalam beracara di arbitrase, mengingat beberapa kali pemerintah Indonesia telah kecolongan akibat mengabaikan pentingnya pemilihan hukum beracara ini. Walaupun penentuan nya juga bisa didasarkan pada kesepakatan pihak, hendaknya pihak yang terlibat dalam suatu sengketa dan bersepakat untuk menyelesaikan kasus mereka ke arbitrase tatap harus berhati-hati ketika melakukan pemilihan dikarenakan akan terkait dengan beberapa hal yang penting dalam proses arbitrase dan bisa berakibat fatal misalnya dibatalkannya putusan arbitrase dikarenakan salah dalam memilih hukum yang akan digunakan ketika beracara di arbitrase, dan ada baiknya juga dalam persetujuan yang telah dibuat oleh para pihak hukum beracara ini dicantumkan secara jelas.
Introduction
There are a number of systems of laws that may simultaneously apply in international commercial arbitration. Those laws are divided into five aspects to which these relate namely the law governing the parties relating to the capacity of the parties entering into an arbitration agreement; the law governing the arbitration agreement and performance of that agreement; the law governing the existence and proceedings of the arbitral tribunal (lex arbitri); the law or the relevant legal issue, governing the substantive issue in dispute, usually describe as applicable law or the substantive law and The law governing the recognition and enforcement. [1] These five laws in a contract can be all the same, and also can be very different from one another.
There is another opinion regarding the laws in arbitration. It is mentioned that there are three laws that apply in international commercial arbitration. Those laws are; the law to govern the substance of the contract, the law to govern the arbitration agreement, and the law govern the arbitration procedure. In practice generally these three laws would be the same, but sometimes these laws are different from one another. The differences of these law in arbitration, can be caused by many reasons, for instance because of the will of the parties themselves.[2]


It is very important to differ the law applicable to arbitration and the law applicable to the substance of the dispute. Because the law applicable to arbitration is the procedural law applicable to the arbitration proceeding, and the law applicable to the substance of the dispute is the law that the arbitral tribunal has to apply to the dispute itself. We may call the law applicable to arbitration as lex arbitri and the law applicable to the substance of dispute as lex causae or substantive law.[3]
But it is important as well to know first what the meaning of the law governing the arbitration is. Alan Redfern and Martin Hunter in their book cited the opinion of Thomas, an English Judge. He mentioned the law governing arbitration is
“A body of rules, which sets as standard external to the arbitration agreement, and the wishes of the parties, for the conduct of arbitration. The law governing the arbitration comprises the rules governing interim measures (e.g. Court orders for the preservation or storage of goods) , the rules empowering the exercise by the Court of supportive measures to assist an arbitration which has run into difficulties (e.g. filling a vacancy in the composition of the arbitral tribunal if there is no other mechanism) and the rules providing for the exercise by the Court of its supervisory jurisdiction over arbitration (e.g. removing an arbitrator for misconduct”.[4]
Relevancy of the Law Governing the Arbitration
There are some relevancies of the law governing the arbitration. Those relevancies are:
a. Arbitrability
The main question of the arbitrator powers relates to arbitrability. Arbitrability means whether a dispute that will be solved can be referred to the arbitration. That is why it is very important to check first whether the dispute is capable to be solved by arbitration or not.[5] If the dispute is not arbitrable based on the applicable law of the arbitration proceeding, it can be become the ground of refusal to settle the case in arbitration, and the national court can take that case. It means that the national court may intervene the arbitration with the ground of this arbitrability. Or if there has been an award, then that award can be challenged. [6]
b. Time limit for commencing of the arbitration
If the parties have chosen the applicable law of the arbitration proceeding then the time limit of the commencing of the arbitration is usually based on this law. . [7] In practice institutional rules such as ICC rules or UNCITRAL Arbitration Rules also regulate this matter.[8]
c. Interim measure and protection.
Lex arbitri in this case provides power to the arbitral tribunal to order provisional and protective measures. But different laws usually have different regulations. In some countries national court have a jurisdiction to order provisional and protective measures upon requested by the arbitration parties, but in the other countries, its lex arbitri prohibited the court to intervene the arbitration proceeding even related to the interim measures.[9]
d. The power of the arbitrator
The power of the arbitrator in arbitration basically is established by the agreement of the parties. But the power of the arbitrator can be given by the applicable law in arbitration proceeding, for example if the parties has no agreement of the expert, then based on the law applicable to the proceeding, then the arbitrator has the power to appoint the expert on behalf of the parties. [10] But if the agreement of the power of the arbitrators is silent on the composition and appointment of the arbitrator or arbitral tribunal, then the law applicable to the arbitration proceeding must be considered. In this case the law applicable the arbitration proceeding will regulates how to appoint the arbitrator or the arbitral tribunal and the commencement of the arbitration.
e. The conduct of the arbitration proceeding regarding the disclosure of the documents, evidence of witnesses
These matters usually covered by the arbitration agreement it self. In case there is no agreement as such, then the law applicable to the arbitration proceeding will regulate these things.
f. Validity of the arbitral award
The arbitrator or arbitral tribunal will do their best effort to make the award is valid and enforceable. Usually the validity of the arbitral awards is depends on the provisions of the arbitration agreement and the law governing the arbitration (lex arbitri). The arbitral awards will be made based on the rules of the applicable law and requirement of the form of the award also dictate base on this rules.[11] If the disputing parties want to challenge the award, again it is also based on the applicable law in the arbitration proceeding, and the court that has jurisdiction to challenge it is the court of the place of arbitration.
Determination of the Law Applicable Governing Arbitration Proceeding
Usually the law governing the arbitration or lex arbitri is based on the will of the parties and the place of the arbitration. It is up to the parties to choose which law they would like to be applied in the arbitration proceeding. And generally, the law that governs the arbitration is the local or national law where the arbitration proceeding held. That is why the parties in determining the arbitration will decide carefully the place that they want to choose as the seat or arbitration because it is relating to the national law in that place that will govern the arbitration proceeding.
We have known before that usually the parties choose the place of arbitration based on the tradition and neutrality. And mostly the choice of the place of the arbitration can be based on the agreement of the parties or determine by the arbitrators or arbitral tribunal.
It is suggested for the parties to mention the applicable law of the arbitration proceeding clearly in their contract. The parties should state in their arbitration agreement which law governing the arbitration process. And in case the parties do not mentioned clearly this law, then the place of arbitration plays an important role. In practice in the absent of choice of the applicable law governing the arbitration proceeding, then usually the law of the place where the arbitration held will be considered as the applicable law in arbitration. It is recognized as “locus arbitri” of the arbitration.
John Collier and Vaughan Lowe mentioned that lex arbitri is much influenced by fundamental conceptions of the nature of the arbitration. It is the common assumption that lex arbitri is the law of the seat of arbitration. They mentioned that there are three major theories about the nature of the arbitration.
The first theory is jurisdictional theory. This theory says that the arbitration is based on the sovereignty of one state. It is true that the parties are free to arbitrate, but that the law of the state grants that freedom. Then it is the right of the state to impose such arbitration regulation. Based on this theory, the arbitral procedure or the applicable law regarding the proceeding of the arbitration has connected to the place of arbitration. So, the law applicable in arbitration procedure is the law of the place of arbitration.[12]
The second theory is contractual theory. Contractual theory mentions it is the freedom of the parties to make the contractual arrangement for their arbitration proceeding. Then it is also the freedom of the parties to determine what kind of applicable law that will be applied in the arbitration proceeding. It is not subject to the place of the arbitration law.[13]
The last theory is autonomy theory. This theory supports the freedom of the parties or the arbitrators to choose the lex arbitri. It is mentioned that the arbitration should be treated as an autonomous legal institution, so it cannot be forced by a legal categories. And arbitration is basically based on the general principle of party autonomy, then it is the autonomy of the parties not to be bound by a domestic procedural law but they can choose any other law that is appropriate for them.
Besides these theories, there is another old theory. That theory is known as ‘the seat theories’. The seat theory says that lex arbitri is lex loci arbitri. It has the meaning that the law applicable to the arbitration proceeding is the law of the seat or the place of arbitration. So, wherever the place of arbitration is, the domestic arbitration procedural law will govern that arbitration proceeding.
The Choice of Applicable Procedural Law under Indonesian Regulatory
With regard to the question of the governing law in arbitration, the Indonesian Arbitration Law also provides the choice of the arbitration procedural in its articles. Those articles are embodied in Chapter IV of this law regarding Procedure Applicable before the arbitration tribunal. The articles that stipulate regarding the choice of the applicable law in arbitration proceeding are especially provide in articles 31, article 34 and article 37.
According to article 34 paragraph 1, the parties may choose to settle their case in national or international arbitration institution. This choice is expressly put in their arbitration clause or their arbitration agreement. In next paragraph, this article provides that the arbitration that has been chosen by the parties shall be done according to the rules and procedures of such designated, except otherwise agreed by the parties.[14]
The rule lied down in article 34 has a meaning that the party may choose the best arbitration institution to which the parties think that it is the best way to settle their dispute. In the event the parties have agreed on it, then the rules and the procedure of that arbitration institution will play an important thing. But, the last sentence of this article gives the autonomy to the parties to agree with any other law governing their arbitration. And if the parties concluded such rules to govern their arbitration, then as long as that rules do not conflicting to the provisions of Indonesian Arbitration Law, the parties are free to choose it.
In addition to the article 34, article 31 also mentions that the parties are free in determining the arbitration procedures to be applied in hearing the dispute, and put it in an explicit written agreement. This article provides that the procedure may not conflict with the provisions of Indonesian arbitration law. The next paragraphs, paragraph 3 and 4, stipulate that in case the parties have not decided the procedure to be applied by them selves, then the arbitrator or the arbitrator tribunal will decide it for the parties based on this law. After the parties have agreed on it, the parties should determine the venue of that arbitration. If the parties do not determine that venue, the arbitrator or arbitral tribunal will determine it on behalf of the parties.[15]
Furthermore, art 37 paragraph 3 regulates that the examination of the witness before the arbitrator or arbitral tribunal shall be carried out on accordance with the provisions of the code of the civil procedure. Then it is means that if the parties want to examine the witness then it is subject to Indonesian code of civil procedure.
From the article 34 and 31, Indonesia also applies the party autonomy in choice of governing law in arbitration. It is indicated that the parties may choose any other institution that they think the best for them to settle their disputes, and from the textual interpretation of the article 34 paragraph 1, the parties are free to choose the law governing their arbitration proceeding. Usually the arbitration institution has their own arbitration sets of procedural law, and if the parties have agreed to submit their case to solve that institution, the parties mostly used that procedural law to govern their dispute.[16]
Regarding the Ad-hoc Arbitration, Indonesian’s Arbitration Law stipulates that it is the right of the parties to apply any rules governing their arbitration as long as the disputing parties agreed upon. Indonesian Arbitration Regulation also provides default procedural law apply of no other rules have been designated. In practice, there are some companies that settle their dispute by using the ad-hoc arbitration besides using the national or international arbitration institution. The Ad-hoc arbitration in this case will adopt its own rules governing the arbitration proceeding. And the adoption of rules in the ad-hoc arbitration in this case based on the agreement of the parties.
Generally, the rules used for the arbitration proceeding are UNCITRAL Arbitration Rules or ICC Arbitration Rules.[17] The choice of UNCITRAL Arbitration Rules or ICC Arbitration Rules because of the consideration that these rules are more flexible then any other rules. Not only Indonesia uses this rules but also any others countries use them.
On the issue of the choice of foreign procedural law in arbitration, Indonesian as a matter of law and as a matter of practice never deals with this problems. This situation is not stipulated in Indonesian arbitration law. Although the rule in article 34 mentions that the parties may choose national and international arbitration institution, and may agree on the governing law for the arbitration proceeding based on the chosen institutions procedural law, but it is not indicated that this law are agreed that the law allow the choice for foreign procedural law in arbitration proceeding.
Laws Applicable governing the Arbitration proceeding based on International Law
There are a number conventions or international laws that stipulate the law applicable in the arbitration proceeding. Below only some conventions or arbitration rules will be elaborated on just to make a description how international law deal with this matter for example Arbitral Proceeding Under ICC Rules of Arbitration of 1998, UNCITRAL Model Law, and ICSID.
ICC rules of arbitration are the flexible rules because it contains provisions that generally accepted by many jurisdictions in different legal system. This rules do not cover all the arbitration procedures that may arise in practice. It just stipulates general rules in arbitration proceeding. Article 15 paragraph 1 stipulates that in arbitration preceding the ICC rules will apply first, but if such matter is not determined by ICC rules, the parties will determine it by them selves. ICC rules recognize party autonomy as the basic principle of the arbitration although there are limitations. For example the agreement to choose the applicable law governing the arbitration procedure that do not stipulated by the ICC rules may not against the public policy or mandatory rules of the applicable law in such countries.[18] Based on article 18(1) ICC rules, the agreement of the parties on the arbitration procedure should be stated in Terms of Reference.
In the situation that the parties do not agree the additional procedure then the arbitral tribunal will determine that for them. The arbitral tribunal also has a duty to check, if the parties have agreed with an additional procedure, they have to make sure that the agreement is not against the mandatory rules and public policy in the place of arbitration. It is important with regard to the recognition and enforcement of the award.[19]
The Geneva protocol 1923 mentions that an arbitration is governed both by the will of the parties and by the law of the countries where the arbitration is held. [20] This also means that the parties have a freedom to determine the law applicable in arbitration preceding, and usually that law is the law where the arbitration takes place.
The New York Convention also stipulated that the award can be set aside if the arbitral procedure is not based in the will of the parties or not accordance of the law of the place of arbitration.[21] And this is important to consider by the arbitrator or arbitral tribunal otherwise the award will set aside by the national court of the place of arbitration.
It is different from the parties that choose institutional arbitration. Usually the institutional arbitration already has its own set of rules that has been provided to the arbitration proceeding. This is much easier for the parties because they don’t have to spend much time to set such rules to govern their arbitration proceeding, for example the parties chosen the ICC can directly apply the ICC Arbitration rules. But as indicated earlier that usually the fee for institutional arbitration is more expensive than ad hoc arbitration fee. So, it is up to the parties to choose, whether ad hoc or institutional arbitration, that they thing are suitable to settle their case.



[1] Julian D.M. Lew, The Place of Arbitration and The Applicable Procedural Law in The English Common Law, in Storm, Marcel and Filip De Ly, The Place of Arbitration, Third International Symposium on The Law of International Commercial Arbitration, Gent, 30-31 May 1991, Mys & Breesch, Uitgevers, 1992, p. 78.
[2] Ibid
[3] Meijer, Gerard G, International Commercial arbitration, see Marielle Koppenol Laforce (ed), et al, International Contract, Aspect of Jurisdiction, Arbitration and Private International Law, First Edition, London, Sweet and Maxwell, 1996 p, 94-95.
[4]Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, Thomson Sweet and Maxwell, London, 2003, p.79
[5] New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards regulates that the arbitrability can become an issue when the national court is called upon to recognize an arbitration agreement or requested to enforce an arbitral awards. The arbitrability is the first question that should be answered. See Art II and article V on New York Convention on Recognition and Enforcement of Foreign Arbitral Awards.
[6] Collier, John and Vaughan Lowe, The Settlement of Disputes in International Law, Institutions and Procedure, Oxford University Press, 1999, at p. 229-230.
[7] Ibid, p.230.
[8] James, Huleatt Mark and Nicholas Gould, International Commercial Arbitration, second Edition, London Hong Kong, LLP, 1999, p. 48-49.
[9] Senen, Ibrahim, Provisional and Protective Measures in Arbitration (Comparative Study between Indonesia and the Netherlands), Rotterdam, 2004, at p. 55-56.
[13] In practice, even the parties has freedom to determine the law besides the law of the seat of arbitration, usually they still choose the lex loci arbitri as their applicable law, this is because not all countries that become the place of arbitration allow the parties choose another law. Then if the parties still do so, then the court may intervene that arbitration that applied the foreign procedural law. See Filip De Ly, The Place of Arbitration, Mys and Breesch, Uitgever, 1992, at p.23.
[14] See Indonesian Arbitration Law; article 34 paragraph 1 and 2.
[15] See, Indonesian Arbitration Law, article 31 paragraphs 1,2, and 3.
[16]For example the parties choose the ICC Court of the arbitration, then based on ICC rules, the parties can use the ICC Rules to govern their dispute. See supra, International law in determining the law governing the arbitration procedure, p.35.
[17] See Information for Foreign Investment Indonesia, http://www.kanwilpajakkhusus.depkeu.go.id.
[18] Eric Schรคfer, at al, ICC Arbitration in Practice, Kluwer Law International 2005, p. 75-7.
[19] ICC Rules article 35 provides that the arbitral tribunal has an obligation to make every effort to ensure that the arbitral award is enforceable at law. That is why they have to check everything carefully to know that there is no agreement of the parties that against the mandatory rules and public policy of the place of arbitration.
[20] See Geneva Protocol 1923, Article 2.
[21] See New York Convention, Article V.I (d).

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