A Queston of Intent: Choice of Law and the International Arbitration Agreement

Article excerpt

Parties to international transactions often include a choice of law clause as part of their arbitration agreement. This article discusses whether the express law chosen by the parties to an international contract governs the procedural rules of arbitration, or is limited to the substantive rights of the parties under their agreement. Recent federal and state court decisions on the "choice-of-law" determination are evaluated in light of the realities of international arbitration today.

With the unprecedented growth of international trade in recent years, international commercial arbitration has evolved as the business community's solution to many of the complexities and pitfalls associated with international commercial litigation.1 For one thing, compared with in-court litigation, arbitration is often cheaper and more efficient.2 Arbitration also shields parties to international agreements from the local biases of foreign tribunals and the obvious risks of litigation in a country whose customs and laws are dissimilar from their own.3 Furthermore, as a wholly consensual process based on clearly defined contractual obligations, arbitration offers a measure of predictability and certainty to commercial transactions and to the resolution of international business disputes.4

Arbitration is further distinguished from htigation by the unique ability of the parties to agree upon many of the specific rules of arbitration that will apply in the event of a future dispute.' Prior to entering into a binding agreement, the parties are likely to negotiate such terms as the place of arbitration, the powers of the arbitrators, the confidential nature of the proceedings, and the language of the proceedings if the parties are of different dialects. Of particular importance to each party will be the inclusion of an express choice of law clause that designates the law governing the parties' contractual agreement as a whole.6 If the parties select a governing law at the onset of their transaction, an arbitrator or court is obligated to respect and to act in accordance with that law in the event of any future dispute.7

While there is little doubt that international arbitration is derived from a carefully constructed agreement between the parties, a problem may arise when the parties interpret this arbitration agreement differently. When that happens, the only available remedy is to seek judicial assistance. Accordingly, the United States has enacted federal legislation that allows U.S. courts to resolve certain pre-arbitration disputes between international parties and to compel arbitration when it is required under the terms of the parties' contractual agreement.8

In deciding whether or not to compel arbitration between international parties, U.S. courts are obligated to comply with the specific terms predetermined within the parties' arbitration agreement.' Thus, if the parties expressly limit the arbitrable issues within their contract, a court is required to respect the parties' autonomous decision not to arbitrate a particular matter." Moreover, if the parties have chosen a specific law to govern their contractual agreement, a court is required to comply with that decision as well.11

While the various judicial obligations under federal arbitration law are fairly well-settled, the proper enforcement by U.S. courts of parties' express choice of law clauses continues to be a difficult and unsettled area within commercial arbitration law. The issue stems from the question of whether the law expressly chosen by the parties to govern a dispute should be applied by a U.S. court to govern procedural questions, such as arbitrability, or is limited to the interpretation of the substantive rights of the parties under the contract. Historically, U.S. courts have ignored the parties' express choice of law and have applied only federal law to questions regarding the arbitrability of a dispute or the validity of an arbitration agreement. …