A business person's guide to negotiating an international arbitration agreement

Multinational Business Review, Spring 1998 by Reinsch, Roger W, DeVito, Raffaele

Selection of Substantive (National) Law Pertaining to the Contract.

By choosing the arbitration organization, the parties also have chosen the procedural rules governing the process, but not the substantive law that will be applied to resolve the legal issues that are the subject of the arbitration. There are some generally recognized international legal principles that state the parties may choose the substantive law of any country that has a logical relationship to the nature of the contract. This rule will limit the parties' choices to a country that somehow relates to the particular contract. Even with a choice of law clause the arbitrators have much latitude as to which laws they will use. It should also be remembered that arbitrators are not limited to using only national laws, but may also use practices of the trade, custom and usage, notions of fairness in reaching their decision.

An additional issue in the choice of law clause is that if the contract involves an international non-consumer transaction in goods, then the United Nations Convention on the International Sale of Goods (CISG) will apply when both countries

have signed the Convention or when the conflict of law rules of the country will result in the application of the CISG. The parties must understand this, and if they do not want the CISG to apply, they must specifically opt out of that Convention in the arbitration agreement, which is allowed under the CISG.

A related problem is that the CISG does not govern such contract issues as the enforceability of the contract itself. Therefore, even when the parties allow the CISG to apply they must still include a choice of law clause for the other legal issues. The clause should read as follows:

To matters not addressed by the CISG, the laws of (country) will apply.

When the parties make their choice of law decision they should be fully informed about the substantive law of the country they have chosen. Such an understanding of the law could be especially critical in such contractual relationships as distributorship agreement and similar agreements that will trigger numerous areas of that country's domestic law if a dispute arises.

Issues of Currency and Interest Rates.

There should be a clause in the arbitration agreement that addresses the issue of currency and interest. The agreement should state in which country's currency the award shall be paid. The agreement should also fix an interest rate - probably the judgment rate of the country whose currency is selected. The agreement should also fix a date from which the interest shall be payable, such as the following:

The award shall include interest from the date of any breach or other violation of this agreement. The other currency problem occurs when there is a breach and the other party may not have paid on time. For example, assume that the buyer breaches a contract where the U.S. seller has agreed to take 1,000,000 DM on the delivery date of May 1 st of that year. In this example, assume the buyer does not pay, claiming that the seller breached by sending substantially nonconforming goods. In the resulting arbitration assume that the seller wins, but the hearing takes one year to complete. If the value of the Deutsche Mark has decreased relative to the dollar during that delay, it means that at the time of the award one million DM will purchase fewer dollars than they would have a year earlier (when the buyer should have paid). The parties need to address this issue in their agreement to be certain that the party who wins will be entitled to an equivalent amount of money to make that party whole.