International Arbitration and Punitive Damages: Delocalization and Mandatory Rules

By Wood, Darlene S. | Defense Counsel Journal, October 2004 | Go to article overview

International Arbitration and Punitive Damages: Delocalization and Mandatory Rules


Wood, Darlene S., Defense Counsel Journal


Now that non-state parties are using international law, the question whether punitive damages arbitration awards can be enforced has become more important

THE TREND toward non-state parties being the subjects of international law and the employment of the body of law known as lex mercatoria have come together with the worldwide acceptance of international commercial arbitration, creating a viable substitute for national courts in resolving increasingly international trade disputes. Law, as it applies to the world economy, has evolved and crystallized into competing concerns of the "delocalization" of the arbitral process and the application of mandatory rules.1

The imposition of punitive damages is a good example of a legal issue where the arbiter's ability to apply lex mercatoria is circumscribed by mandatory rules. Discounting these rules could adversely affect the eventual enforcement of the award. Although custom and usage has taken center stage in the arbitral decision, it is clear that the laws of sovereign nations cannot be completely ignored.2

Lex mercatoria is framed against a backdrop of conventional notions of international law. International commercial arbitration employs lex mercatoria as one of its most effective tools in resolving disputes. But are punitive damages viable awards in international arbitration? It will become clear that in the area of punitive damages, lex mercatoria has no place in international commercial arbitration, even though the subjects of the law are non-state actors.

INTERNATIONAL LAW

In order to appreciate the role of lex mercatoria in international law and the issue of punitive damages, one must look at what is traditionally accepted as "international law." But even this innocuous endeavor is fraught with contention among legal scholars.3

Article 38 of the Statute of the International Court of Justice recognizes three major sources of public international law: international conventions, international custom, and the general principles of law recognized by civilized nations. Article 59 also considers judicial decisions and the teachings of highly qualified publicists of various nations as additional sources.

A. International Treaties and Conventions

International treaties and conventions are regarded at the first source of international law, but only one kind actually makes law-the "law-making" treaty, which is an agreement between two or more nations intended to create new rules to be respected by them. Only the signatories are bound initially, and, depending on the number of ratifying states, the treaty can become a source of regional or international law. Unless a state specifically refuses to sign, over time it can become bound by the agreement.4 Another way regional law can be created is by resolutions and declarations, even though ratification is not required.

Now the globalization of the world economy has infringed on these bastions of authority, adding non-state actors who heretofore had little power.5 Traditionally, the true "subjects" of the law were sovereign states, whereas the individual was considered the "object" of the law. Intergovernmental organizations, derivative subjects of international law such as the United Nations, achieved status as legal persons only by explicit grant of authority in treaties. The trend, however, is to include the non-state actor as a subject of the law as well. Non-governmental organizations-the International Monetary Fund and the World Trade Organization, as examples-attend international conferences, actively seeking to participate in the further development of international law. It is now being argued that even individuals have achieved the status of "partial subjects" under international law.6

B. International Custom

With the rise of non-state actors in the international law arena, there is an overlap in public and private international law with regard to custom, the second source of international law. …

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International Arbitration and Punitive Damages: Delocalization and Mandatory Rules
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