I. Introduction
Determining the law applicable to the merits of a dispute is one of the most critical aspects of international arbitration. It plays a key role in ensuring that disputes are resolved in a predictable and fair manner and that the arbitral award is ultimately enforceable.
Today, most international commercial agreements include choice-of-law clauses. Their inclusion has become increasingly common, particularly due to the growing popularity of arbitration as a method of dispute resolution. However, parties may occasionally neglect, or deliberately choose not, to insert such clauses into their contracts. When a dispute arises in these circumstances, the absence of a choice-of-law provision adds complexity and prolongs the dispute resolution process. This challenge can be easily avoided by selecting the applicable law at the time of contract formation.
This article first explores how parties may determine the law governing the merits of a dispute, then considers how such determinations are made in the absence of an express choice. The final section offers recommendations on how to effectively make this selection.
II. Determination of the Law Applicable to the Merits of the Dispute by the Parties
Arbitration, as a judicial function, requires arbitrators to issue a binding award that resolves the dispute between the parties. To do so, they must determine the substantive legal norms applicable to the merits of the case.[1] It is important to distinguish this substantive law from both the law governing the arbitration agreement and the procedural law of the arbitration (lex arbitri).
A well-established principle in international arbitration is that parties are free to choose the law governing the arbitration agreement, the arbitral procedure, and the substantive law that arbitrators will apply to the merits of the dispute.[2]
This choice typically refers to the law of a specific country.[3] Parties may make this designation in one of the following ways: within the arbitration clause embedded in the substantive contract[4], separately within the main contract, or through a stand-alone “choice of law agreement”. Party autonomy in selecting applicable law also extends to “anational rules” (non-national rules)[5] which may be treated as binding rules of law distinct from national legislation.[6]
Such choice of law can be express or implied:
- (a) Express choice means the substantive rules of the selected law apply directly. Unless agreed otherwise, conflict-of-laws principles under that law are excluded.[7]
- (b) Implied choice must be inferred from the parties’ intentions, based on a review of the contract’s terms and the parties’ overall conduct. Indications of an implied choice may include: use of language or legal terminology tied to a specific jurisdiction, contractual features (e.g., place of delivery or nationality of a party) pointing toward a particular country, parties referring to the same national law when asserting claims.
A recurring debate concerns whether the choice of the arbitral seat or procedure suggests an implied choice of substantive law. The predominant view is that it does not: the seat is selected for its procedural framework, not for its substantive legal rules. Therefore, the choice of arbitral seat should not be interpreted as a choice of substantive law.[8]
Finally, once the parties have made a valid choice of applicable law, the arbitral tribunal is bound by it. Arbitrators are not permitted to disregard or override the parties’ chosen law based on perceived inadequacy, unfairness, or irrelevance to the dispute.
III. Absence of Party Agreement on Applicable Law
The parties may be unable to agree on the law applicable to the substance of the dispute due to various factors, including the potential for disagreement during the process of selecting the governing law. In such cases, the applicable law is determined through one of two primary approaches:[9] Indirect determination via conflict of laws (voie indirecte) and direct determination of substantive law (voie directe).
A. Determination of the Applicable Law through a Conflict of Laws System
Unlike judges, arbitrators are not bound to apply a single conflict of laws system. As a result, arbitrators must identify which conflict of laws rules are applicable in a given case. Four of the methods by which the applicable law is determined using the conflict of laws system are as follows:[10]
- (a) Application of the conflict of laws rules of the seat of arbitration
- (b) Cumulative application of all conflict of laws rules relevant to the dispute
- (c) Application of general principles of conflict of laws
- (d) Application of the conflict of laws rules deemed appropriate by the arbitral tribunal
Modern international arbitration laws and institutional arbitration rules provide that arbitrators should directly apply the substantive law to resolve disputes, rather than resort to conflict of laws rules. The remainder of this article analyzes the direct determination of the substantive law applicable to the merits of the dispute.
B. Direct Determination of Substantive Law
In this approach, arbitrators resolve the dispute by directly applying the law or rules of law they consider appropriate, without resorting to any conflict of laws rules. Arbitrators may apply the following methods:
1. Application of the Substantive Law Most Closely Connected to the Underlying Dispute
Under this method, arbitrators must identify and apply the substantive law that has the closest connection to the case.
Pursuant to IAL Art. 12/C/2[11], the arbitral tribunal shall decide in accordance with the substantive law of the state it determines to be most closely connected with the dispute.[12] The tribunal is not permitted to apply non‑national rules of law.
2. Application of the Substantive Rules Deemed Appropriate by the Arbitrators
This approach, codified in Article 1511 of the French Code of Civil Procedure, has been adopted in the arbitration laws of various countries. While some jurisdictions permit the application of non‑national rules, others stipulate that arbitrators may only apply national law they deem appropriate.[13] This second approach is reflected in Article 35/1[14] of the UNCITRAL Arbitration Rules 2010, which states: “tribunal shall apply the law which it determines to be appropriate”. Accordingly, arbitrators are authorized to apply a national law that they consider suitable, and the application of non‑national rules is not permitted.
ICC Rules Article 21/1[15] also provides that arbitrators may directly apply the law they deem appropriate, without resorting to conflict of laws rules. By using the term “rules of law”, the ICC Rules authorize arbitrators to apply non‑national rules and do not require the applicable law to be a national law.[16]
An advantage of this approach is that it enables the application of the national law or rule of law most suitable to the specific dispute. However, allowing arbitrators to directly apply substantive law without conducting a conflict of laws analysis may invite criticism for its subjectivity, potentially undermining the predictability and fairness expected in arbitral decision-making.
C. Determination in Accordance with Contractual Provisions and Commercial Customs
To resolve the dispute at hand, the arbitral tribunal will primarily apply the provisions of the contract. Where those provisions are insufficient, the tribunal shall consider the usages of trade and the practices of the parties. UNCITRAL Model Law Article 28/4[17] provides that, in all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the trade usages applicable to the transaction. Article 35/3 of the UNCITRAL Arbitration Rules reiterates the same rule.[18]
The same approach is adopted in Article 21/2 of the ICC Rules[19], which provides that the arbitral tribunal shall take account of the provisions of the main contract between the parties as well as the relevant trade usages and practices. However, one notable difference exists between the ICC Rules and the UNCITRAL Model Law and UNCITRAL Arbitration Rules. While the ICC Rules require the arbitral tribunal to “take account of” the contractual provisions between the parties, the UNCITRAL Model Law and Arbitration Rules direct the tribunal to “decide in accordance with” those provisions. This variation in the ICC rules is possibly intended to ensure that the mandatory rules of law are not circumvented by applying contractual provisions.
Turkish IAL Article 12/C/1[20] includes the provision “In the interpretation and supplementing of the provisions of the contract, commercial traditions and trade usage relating to that law shall also be taken into account.” The following inferences can be drawn from this:
- (a) Trade usage is to be considered only for interpreting the contract and supplementing omissions. This approach ensures that trade usage does not override the applicable law. Given that trade usages are not rules of law and do not absolve the need to identify the applicable law, this provision is appropriate. However, where the parties explicitly agree to apply a specific trade usage, it shall be treated and enforced as a contractual term.
- (b) Only the commercial traditions, practices and trade usage arising within the legal system applicable to the agreement shall be considered. However, in international arbitration practice, greater weight is often placed on traditions and practices stemming from international commercial practice, rather than those rooted in national legal systems.[21]
D. Determination as Amiable Compositeur, Ex Aequo Et Bono
In international arbitration, it is recognized that the arbitral tribunal may resolve a dispute as an amicable compositeur or ex aequo et bono, provided the parties have expressly authorized it. This allows a tribunal to give effect to a contract that may otherwise be deemed invalid under a particular legal system. Although UNCITRAL Model Law Article 28/3, UNCITRAL Arbitration Rules Article 35/2, ICC Rules Article 21/3 and IAL Article 12/C/3 permit arbitrators to be vested with this discretionary power, it is not common in practice.
Unlike ex aequo et bono, when acting as an amiable compositeur, the arbitrator or the arbitral tribunal remains bound by abstract legal principles, i.e. the generally accepted norms of international law. In this context, the authority to decide ex aequo et bono may be seen as conferring broader discretion upon the arbitrator to resolve the dispute.[22]
There is ongoing legal debate regarding the extent to which arbitrators acting as amiable compositeurs can still engage with a law or rule of law, or are bound by contractual provisions. One perspective holds that such authority does not empower arbitrators to disregard the law/rules of law entirely; rather, it permits them to reach an equitable award by bypassing rigid provisions. Another viewpoint asserts that arbitrators are granted discretion to resolve disputes without being bound by any legal system or rule. Some scholars maintain that arbitrators cannot wholly disregard the parties’ agreement.[23]
IV. Conclusion
In international arbitration, where the parties have identified the law applicable to the merits of the dispute, the arbitral tribunal is required to apply the designated law. In the absence of such an agreement, the tribunal may resort to conflict of laws rules or directly determine the applicable substantive law. Although less common in practice, both international arbitration institutions and national arbitration laws permit arbitrators to render awards as amiable compositeur or ex aequo et bono.
The parties’ determination of the law applicable to the merits of the dispute in advance, at the contractual stage, and the direct designation of the substantive law without reference to conflict of laws rules can help avoid stalemates in the dispute resolution process arising from the parties’ failure to reach an agreement on this issue. It also prevents the application of legal rules that were not contemplated by the parties, thereby ensuring that proceedings remain fair and aligned with the commercial agreement of the parties. In making this choice, the parties should carefully consider the practical dimensions of their relationship, including their respective positions within the commercial arrangement and the jurisdiction in which the underlying transaction is conducted. Such foresight contributes to a more efficient and coherent dispute resolution outcome.
[1] Sibel Özel, “Tahkimde Uyuşmazlığın Esasına Uygulanan Hukuk”, Tahkim ve Uygulanacak Hukuk, 2021, (“Özel”) p. 194.
[2] Özel, p. 194.
[3] Ali Yeşilırmak, ICC Tahkim Kuralları ve Uygulaması, 1. Baskı, On İki Levha Publishing, 2018, (“Yeşilırmak”) p. 100.
[4] In the event that the parties make a choice of law in the arbitration clause, it should be clearly stated whether the law chosen is the law applicable to the arbitration procedure or the law applicable to the merits. Pursuant to Article 12/C/1 of the International Arbitration Law no. 4686 dated 21 June 2001 (“IAL”), unless otherwise specified, the competent law shall be deemed to have been chosen to apply to the merits.
[5] Non‑national rules are rules that are not incorporated into the legal system of any individual state. İbrahim Doğan Takavut, Milletlerarası Ticari Tahkimde Doğrudan Uygulanan Kurallar, 1. Baskı, On İki Levha Publishing, 2018, pp. 19-20.
[6] The international community has adopted the option for parties to choose non-national substantive provisions in place of state law. See UNCITRAL Arbitration Rules (2021) (“UNCITRAL Arbitration Rules”), art. 35/1, Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (“ICSID Convention”) (2006), art. 42/1; UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006 (“UNCITRAL Model Law”), art. 28/1 and ICC Rules of Arbitration (2021) (“ICC Rules”), art. 21/1. Article 12/C/1 of the IAL also recognizes that the parties may make such a choice by using the term “rules of law” instead of “law”.
[7] For example, UNCITRAL Model Law, art. 28/1; IAL, art. 12/C/1.
[8] Hatice Özdemir Kocasakal, “Doğrudan Uygulanan Kuralların Milletlerarası Tahkimde Esasa Uygulanacak Hukuk Üzerindeki Etkileri” Tahkim ve Uygulanacak Hukuk, 2021, (“Özdemir Kocasakal”) pp. 231-232.
[9] Özel, p. 203 et seq.
[10] Özel, pp. 204-207.
[11] IAL, art 12/C/2: “If the parties have not agreed on the rules of law applicable to the merits of the dispute, the arbitrator or the arbitral tribunal shall decide in accordance with the rules of substantive law of the state it determines to be most closely connected with the dispute.”
[12] Some scholars argue that art. 12/C of the IAL constitutes a special conflict of laws rule introduced for arbitration. Özdemir Kocasakal, pp. 231-232; Özel, pp. 208-209; Ziya Akıncı, Milletlerarası Tahkim, 4. Baskı, Vedat Kitapçılık, 2016, (“Akıncı”), pp. 232-233.
[13] Özel, pp. 208-209.
[14] UNCITRAL Arbitration Rules, art. 35/1: “The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate.”
[15] ICC Rules, art. 21/1: “The parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute. In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate.”
[16] Özdemir Köseoğlu, “Uluslararası Ticari Tahkimde Uyuşmazlığın Esasına Uygulanacak Hukukun Belirlenmesinde İrade Serbestisi Sınırları”, Ankara Barosu Dergisi, 2020, p. 107.
[17] UNCITRAL Model Law, art. 28/4: “In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.”
[18] UNCITRAL Arbitration Rules, art. 35/3: “In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract, if any, and shall take into account any usage of trade applicable to the transaction.”
[19] ICC Rules, art. 21/2: “The arbitral tribunal shall take account of the provisions of the contract, if any, between the parties and of any relevant trade usages.”
[20] IAL, art. 12/C/1.
[21] Akıncı, pp. 231-232.
[22] Zeynep Özgenç, “Milletlerarası Ticari Tahkimde Hakemin veya Hakem Kurulunun Ex Aequo Et Bono Karar Verme Yetkisi”, Public and Private International Law Bulletin, 2014, p. 50.
[23] Özel, pp. 211-213.
