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Czech (& Central European) Yearbook of Arbitration

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Institutions Participating in the CYArb Project Academic Institutions University of West Bohemia in Pilsen, Czech Republic Faculty of Law, Department of International Law & Department of Constitutional Law [Západočeská univerzita v Plzni, Právnická fakulta. Katedra mezinárodního práva & Katedra ústavního práva]

Czech (& Central European) Yearbook of Arbitration

Impressum

Masaryk University (Brno, Czech Republic), Faculty of Law, Department of International and European Law [Masarykova univerzita v Brně, Právnická fakulta, Katedra mezinárodního a evropského práva] Pavol Jozef Šafárik University in Košice, Slovak Republic Faculty of Law, Department of Commercial Law and Business Law [Právnická fakulta UPJŠ, Košice, Slovensko. Katedra obchodného a hospodárskeho práva] VŠB – TU Ostrava, Czech Republic Faculty of Economics, Department of Law [VŠB – TU Ostrava, Ekonomická fakulta, Katedra práva] Institute of State and Law of the Academy of Sciences of the Czech Republic, v.v.i. [Ústav státu a práva Akademie věd ČR, v.v.i.]

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Czech (& Central European) Yearbook of Arbitration

Impressum

Non-academic Institutions Participating in the CYArb Project International Arbitral Centre of the Austrian Federal Economic Chamber [Wiener Internationaler Schiedsgericht (VIAC), Vienna] Court of International Commercial Arbitration Attached to the Chamber of Commerce and Industry of Romania [Curtea de Arbitraj Comercial Internaţional de pe lângă Camera de Comerţ şi Industrie a României, Bucharest] Arbitration Court Attached to the Hungarian Chamber of Commerce and Industry [A Magyar Kereskedelmi és Iparkamara mellett szervezett Választottbíróság, Budapest] Arbitration Court Attached to the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic [Rozhodčí soud při Hospodářské komoře České republiky a Agrární komoře České republiky, Prague] Arbitration Court Attached to the Czech-Moravian Commodity Exchange Kladno [Rozhodčí soud při Českomoravské komoditní burze Kladno (Czech Republic)] ICC National Committee Czech Republic [ICC Národní výbor Česká republika] The Court of Arbitration at the Polish Chamber of Commerce in Warsaw [Sąd Arbitrażowy przy Krajowej Izbie Gospodarczej w Warszawie] Slovak Academy of Sciences, Institute of State and Law, Slovak Republic [Slovenská akadémia vied, Ústav štátu a práva. Bratislava, Slovensko] ||| Proofreading and translation support provided by: Agentura SPA, s. r. o., Prague, Czech Republic, and Pamela Lewis, USA.

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List of Abbreviations ............................................................................................

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Czech (& Central European) Yearbook of Arbitration

Contents

ARTICLES Andrzej Kubas │ Kamil Zawicki The Scope of Mandatory Provisions of Procedural and Substantive Law Binding upon a Court of Arbitration ..............................

3

Alexander J. Bělohlávek Application of Law in Arbitration, Ex Aequo et Bono and Amiable Compositeur ..................................................................................

25

Vit Makarius The Nature of the Burden and Standard of Proof in International Commercial Arbitration ......................................................

53

Klára Drličková The Law Applicable to Arbitration Agreements – “Lex Arbitri” or “Lex Causae” of the Principal Contract? ........................

71

Leonid Shmatenko Is Lex Mercatoria Jeopardizing the Application of Substantive Law? ...................................................................................................

89

Vasily N. Anurov Cause of Action in Investment Arbitration ................................................... 109 | ix

Czech (& Central European) Yearbook of Arbitration

Contents

Marina P. Bardina Determination of Substantive Law by International Commercial Arbitration in Russian Law, ICAC Rules and Arbitration Practice ..................................................................................... 123

CASE LAW Section A I. Current Case Law of the Constitutional Courts and General Courts on Arbitration .................................................................................... 147 1. Czech Republic Alexander J. Bělohlávek.................................................................................... 147 2. Hungary Alexander J. Bělohlávek.................................................................................... 201 3. Poland Andrzej Kubas | Kamil Zawicki | Magdalena Selwa ................................. 211 4. Slovak Republic Alexander J. Bělohlávek.................................................................................... 239 II. Court Rulings on the Application of Law in Arbitration Czech Republic Alexander J. Bělohlávek.................................................................................... 243 Section B Case Law of the Arbitral Tribunals: Decisions of Arbitral Tribunals within the Jurisdiction of the Arbitration Court Attached to the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic ...................................... 255 1. Current Case Law on Arbitration Alexander J. Bělohlávek.................................................................................... 255 2. Application of Law in Arbitration Alexander J. Bělohlávek.................................................................................... 283 3. Borders of Procedural and Substantive Law in Arbitration Alexander J. Bělohlávek.................................................................................... 308

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BOOK REVIEWS Alexander J. Bělohlávek Act on Arbitration Proceedings and Enforcement of Arbitration Awards, A Commentary ............................................................... 319 NEWS & REPORTS Rajko Knez │Marko Djinović | Nejc Lahne Arbitration in Slovenia — A New Perspective .............................................. 323 Alexander J. Bělohlávek New Rules of the Arbitration Court Attached to the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic............................................... 333

Czech (& Central European) Yearbook of Arbitration

Contents

Bohumil Poláček Arbitration Expert Witnesses ............................................................................ 353 Miluše Hrnčiříková Fifth Annual Olomouc Pre-Moot ..................................................................... 361 Current Events, Past & Ongoing CYIL/CYArb Presentations .......................

363

Selected Bibliography of Czech, Slovak and Polish Authors for 2012...................................................................................................... 375 Important Web Sites ..............................................................................................

395

Index .......................................................................................................................... 409

All contributions in this book are subject to academic review.

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AA AC ADR ArbAct [CZE] AUT BIT CC CC RF CCP CIETAC CISG COA CommC ConCourt Constitution [POL]

arbitration award(s) Arbitration Court at the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic Alternative Dispute Resolution Act [Czech Republic] No. 216/1994 Coll., on Arbitration and Enforcement of Arbitral Awards, as subsequently amended the Republic of Austria Bilateral Investment Treaty Act [Czech Republic] No. 40/1964 Coll., as subsequently amended, Civil Code Civil Code of the Russian Federation Act [Czech Republic] No. 99/1963 Coll., as subsequently amended, Code of Civil Procedure China International Economic and Trade Arbitration Commission Convention on the International Sale of Goods Cause of Action Act No. 513/1991 Coll., as subsequently amended, Commercial Code Constitutional Court of the Czech Republic Konstytucja Rzeczypospolitej Polskiej z dnia 2 kwietnia 1997 r. [Constitution of the Republic of Poland of 2 April 1997], published in: Dziennik Ustaw [Journal of Laws] 1997, No. 78, item 483, as amended

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List of Abbreviations

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Czech (& Central European) Yearbook of Arbitration

List of Abbreviations

CZE ECICA EConv ECJ EU ExecProcC HUN Charter

ICAC ICC ICDR ICJ ICSID INCOTERMS NAFTA k.c. [POL]

k.p.c. [POL]

NCC

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Czech Republic Egyptian Chamber of International Commercial Arbitration European Convention on International Commercial Arbitration, done in Geneva on 21 April 1961 European Court of Justice European Union Executory Procedure Code. Act [Czech Republic] No. 120/2001 Coll., on Judicial Executors and Executory Activities Hungary Charter of Rights and Freedoms of the Czech Republic – Resolution of the Presidium of the Czech National Council No. 2/1993 Coll. of 16 December 1992 on the promulgation of the Charter of Fundamental Rights and Freedoms as a part of the constitutional order of the Czech Republic, as amended by the Constitutional Act of the Czech Republic No. 162/1998 Coll. International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry International Chamber of Commerce International Centre for Dispute Resolution International Court of Justice International Centre for Settlement of Investment Disputes International Commercial Terms North American Free Trade Agreement Kodeks cywilny z dnia 23 kwietnia 1964 r. [Civil Code of 23 April 1964], published in: Dziennik Ustaw [Journal of Laws] 1964, No. 16, item 93, as amended Kodeks postępowania cywilnego z dnia 17 listopada 1964 r. [Code of Civil Procedure of 17 November 1964], published in: Dziennik Ustaw [Journal of Laws] 1964, No. 43, item 296, as amended Act [Czech Republic] No. 89/2012 Coll., Civil Code, effective as of 1 January 2014 and replacing also CC [CZE] and CommC [CZE]

New York Convention

NYConv PIL PILP R RC RSP

SC SVK UNIDROIT UNCITRAL u.z.n.k. [POL]

VAT

New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 [Konwencja o uznawaniu i wykonywaniu zagranicznych orzeczeń arbitrażowych, sporządzona w Nowym Jorku dnia 10 czerwca 1958 r.], published in: Dziennik Ustaw [Journal of Laws] 1962, No. 9, item 41 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the New York Convention Act [Czech Republic] No. 91/2012 Coll., on Private International Law, effective as from 1 January 2014 and replacing also some provisions of ArbAct [CZE] Act [Czech Republic] No. 97/1963 Coll., as subsequently amended, on Private International Law and Procedure Resolution (rendered in arbitral proceedings or in course of a court litigation) Regional Court(s) [Czech Republic] Part of the dossier numbers of disputes handled by the AC and formerly by the AC at the Czechoslovak Chamber of Commerce and Industry. This abbreviation is followed by the reference number of the case (before the slash) and the year the case was submitted to the AC (after the slash). Supreme Court of the Czech Republic Slovak Republic International Institute for the Unification of Private Law United Nations Commission on International Trade Law Ustawa z dnia 16 kwietnia 1993 r. o zwalczaniu nieuczciwej konkurencji [The Suppression of Unfair Competition Act of 16 April 1993], consolidated, published in: Dziennik Ustaw [Journal of Laws] 2003, No. 153, item 1503, as amended. Value added tax

Czech (& Central European) Yearbook of Arbitration

List of Abbreviations

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Articles

Andrzej Kubas │ Kamil Zawicki The Scope of Mandatory Provisions of Procedural and Substantive Law Binding upon a Court of Arbitration ..............................

3

Alexander J. Bělohlávek Application of Law in Arbitration, Ex Aequo et Bono and Amiable Compositeur ..................................................................................

25

Vit Makarius The Nature of the Burden and Standard of Proof in International Commercial Arbitration ......................................................

53

Klára Drličková The Law Applicable to Arbitration Agreements − “Lex Arbitri” or “Lex Causae” of the Principal Contract? ..................................................

71

Leonid Shmatenko Is Lex Mercatoria Jeopardizing the Application of Substantive Law? ...................................................................................................

89

Vasily N. Anurov Cause of Action in Investment Arbitration ................................................... 109 Marina P. Bardina Determination of Substantive Law by International Commercial Arbitration in Russian Law, ICAC Rules and Arbitration Practice ..................................................................................... 123

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Application of Law in Arbitration, Ex Aequo et Bono and Amiable Compositeur Abstract | Arbitrators are basically obliged to make decisions according to applicable substantive law. Most lex arbitri, however, allow for decision making according to principles of equity (ex aequo et bono) or for arbitrators to assess a dispute and act in proceedings as an amiable compositeur. An allowance to decide the merits ex aequo et bono does not mean to act as amiable compositeur and vice versa. Under French law, as the origin of amiable compositeur, this is a procedure where the arbitrators are to make decisions according to the law and legal principles, but they are entitled to alter the effects of the application of specific legal norms. Equity (equita) is only one of the dimensions of such decision making. This concept can be described as a process in search of the law and equity in order to find an equitable and possible solution. This approach has, however, undergone a significant transformation from the original concept in many jurisdictions. Unlike decision making as an amiable compositeur, which should mainly establish limits of applicability of the governing law and the method of application thereof for purposes of a fair hearing, ex aequo et bono is grasped in international practice as decision making praeter legem, in the domain of principles of morality and equity. In cases of equity, the focus is on the arbitrator’s subjective sense of justice. |||

Key words: abuse of law | amiable compositeur | amicable settlement | applicable law | authorization | choice of law | construction work | continental doctrine | customs | dépeçage | ex aequo et bono | fair treatment | general principles of law | governing law | lex arbitri | lex mercatoria | ordre public |plugging gaps in the law | praeter legem | principles of equity | principles selected by arbitrators | private international law | public policy | settlement | practices | valid law |

Czech (& Central European) Yearbook of Arbitration

Alexander J. Bělohlávek

Alexander J. Bělohlávek, Univ. Professor, Dr.iur., Mgr., Dipl. Ing. oec/MB, Dr.h.c. Lawyer admitted and practising in Prague/CZE (Branch N.J./US), Senior Partner of the Law Offices Bělohlávek, Dept. of Law, Faculty of Economics, Ostrava, CZE, Dept. of Int. and European Law, Faculty of Law, Masaryk University, Brno, CZE (visiting), Chairman of the Commission on Arbitration ICC National Committee CZE, Arbitrator in Prague, Vienna, Kiev etc. Member of ASA, DIS, Austrian Arb. Association. The President of the WJA – the World Jurist Association, Washington D.C./USA. e-mail: [email protected]

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Alexander J. Bělohlávek

I. Decision Making According to Valid Law 2.01.

II. Exception to the Application of Substantive Rules in Arbitration 2.02.

2.03.

2.04.

2.05.

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Arbitrators are basically obliged to make decisions according to applicable substantive law. Applicable law refers to decision making in accordance with applicable legal regulations and in accordance with the way the law is applied in the state to which it pertains. It encompasses the legal order both as a whole and in its individual components. In contrast to the interpretation of decision making in accordance with the principles of equity, however, decision making according to applicable law does not cause major problems in practice. Therefore, in the following discussion, detailed attention will be paid to the concept of decision making according to the principles of equity, as well as to other similar mechanisms applied in practice or occurring in domestic and, especially, international arbitration.

Besides decision making according to normative systems of governing law, arbitration stands out, because most lex arbitri regulations allow for decision making according to the principles of equity (ex aequo et bono) or for arbitrators to assess the dispute and act in the proceedings as an amiable compositeur. These approaches are particular to arbitration. For the purposes of decision making according to the principles of equity, it is irrelevant whether the dispute is international or domestic. Such an approach, however, must not transgress the framework of the principles of the legal system and social order at the place of proceedings, i.e. it must not exceed the limits of public policy (ordre public). The authority to make decisions according to the principles of equity may be delegated by the parties to the arbitrators, directly in the arbitration agreement (arbitration clause) or under an agreement reached by the parties at any time during the arbitration proceedings before the arbitral award is made. It is also possible for the arbitral tribunal to be empowered to make decisions in accordance with the principles of equity verbally, but always explicitly, e.g. at an oral hearing. A verbal instruction is considered to have been made in writing provided that it is recorded in the minutes of the oral hearing. In contrast to the requirement of express authorization pursuant to some national laws on arbitration, which requirement shall be understood as a rule, implicit authorization is recognized in certain countries (e.g. Switzerland, the Netherlands etc). In this case, the arbitrators bear increased responsibility to convince themselves of the

2.06.

parties’ intentions and the existence of sufficient authority, as an absence thereof could lead to the annulment of the arbitral award. Also, under lex arbitri rules, which do not require explicit authorization to be conferred on arbitrators, it is necessary to insist on the stipulation that such authorization and the content thereof must be free of doubt. The unambiguity of the parties’ arrangements to authorize an arbitrator to make decisions according to the principles of equity is discussed separately below.

III. Distinguishing Decision Making Following the Principles of Equity from the Amiable Compositeur Procedure 2.07.

2.08.

The doctrinal, normative and practical approach to decision making according to the principles of equity varies considerably in various countries. There are even differences in the way this term is interpreted. In principle, it is possible to distinguish two concepts, which are (i) the ability to make decisions as an amiable compositeur, or (ii) decision making according to the principles of equity.1 In legal theory, although these decision-making methods are two different concepts, in practice they clash with each other, and sometimes it is somewhat difficult to tell them apart. Nevertheless, they can be identified as two separate approaches, as follows from foreign and international rules and the standards governing them.2 As these are sui generis unmistakable concepts, the allowance to decide the merits ex aequo et bono does not mean to act as amiable compositeur in the strict sense and vice versa. Some states only recognize amiable compositeur procedures,3 whereas other countries rely exclusively on decision making ex aequo et bono.4 A further group of countries especially those that have adopted the UML recognizes Various names have emerged in international terminology, such as “nach Billigkeit” and “nach billigem Ermessen” (German), “en equite” (French), “ex aequo et bono”, “according to equity principles”, etc. 2 See, for instance: ¾ ICC Rules – Article 21(3) (2012 version) (cit.): “The arbitral tribunal shall assume the powers of an amiable compositeur or decide ex aequo et bono only if the parties have agreed to give it such powers.” For the former wording, see Article 17(3) of the ICC Rules (1998 version). This wording implies a qualitative difference between the two procedures as the amiable compositeur is a “procedural approach”, while ex aequo et bono entails “decision making”. ¾ UML – Article 33(2); analogous to Article 21(3) of the ICC Rules. 3 For example, France and Quebec. 4 For example, in Switzerland and Italy, as well as the Czech Republic and Slovakia.

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Alexander J. Bělohlávek

2.09.

both concepts equally or, despite regulating one or both procedures, conceals them within other rules or within an otherwise termed concept. However, irrespective of whether they make decisions as an amiable compositeur or according to the principles of equity, arbitrators are not exempted from the obligation to resolve disputes “on their merits” and “authoritatively.” There can be no comparison, for example, with settlement proceedings where the position of conciliators or mediators also comes close, in certain respects, to the position of a party’s counsel and/or advocate of a party’s interests. In the concept of arbitration, arbitrators cannot hold such a status even when they are making decisions according to principles of equity, or when arbitrators are empowered (either by law5 or by consent of the parties) to try to persuade the parties to agree on an amicable settlement to the dispute in the course of the arbitral proceedings.6 The latter approach is closer to the procedures applied in judicial proceedings, where the judge also has the task of guiding the parties to the possibility of an amicable settlement. Furthermore, the fact that a state only uses one of the terms (concepts) in question does not necessarily mean that such a term is only attributed to the meaning of one of these concepts. For example, in Mexico arbitrators make decisions solely as an amiable compositeur, but in practice both approaches are used, i.e. arbitrators may make decisions under substantive law or solely on the basis of what they consider fair. This is also connected with the diversified approach taken in national and international practice regarding the definition of the terms amiable compositeur and ex aequo et bono. It is essential to note that in specific cases individual national legal systems allowing for one of the decision-making variants in accordance with principles of equity may set out the contents of the terms differently. The boundaries between the cited approaches are increasingly blurred; this can also be attributed to the dividing lines between substantive and procedural assessments, which vary depending on the legal culture and legal system. This is particularly well-expressed by various published opinions on a common theme, namely, that responsibility rests with the parties to the dispute. In the way their granting of powers to make decisions according to principles of equity is worded, the parties can also determine and influence the arbitrators’ decision-making boundaries and thus define the discretion

Section 24(1) of the Czech Act on Arbitration as well as in other legal systems. Of course, the arbitrators do not take the position of mediator and other ADRs have to be differentiated strictly. 5

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6

2.10.

2.11.

to be used for decision making according to the principles of equity. Authorization to make decisions according to the principles of equity is quite a major decision requiring careful consideration by the parties as, while this may be beneficial to the parties, it could also backfire. The parties should consider what kind of situations may arise, especially when they seek to prove their claims. For example, a case heard in the Czech Republic in arbitration within the jurisdiction of a permanent arbitral institution assessed a claim for defects in the delivery of technological equipment. A number of circumstances indicated that the equipment was faulty and even that there was a design flaw in the technology. Nevertheless, in order to minimize damage, the respondent fixed the defect and customized the equipment. However, this resulted in such a change that it was impossible to produce in the case any crucial evidence, i.e. evidence in the form of an expert opinion. Although the tribunal’s quite clear “impression” was that the claimant had a valid claim, it was objectively impossible to furnish evidence to substantiate the claim to the extent that the Czech law (the law applicable in the particular case) required proof of a claim for damages. As the tribunal was not entitled to decide this matter under the principles of equity, it had no choice but to dismiss the claim, despite realizing the considerable harshness of this decision. Nevertheless, if the tribunal had been entitled to decide the same matter under the principles of equity, then it is not inconceivable that the substantive decision would have been different. Decision making according to the principles of equity thus appears to be particularly suited to deliveries of technological equipment. It is also often appropriate for construction work. Construction work is the subject of a large number of disputes in arbitration in many countries. First and foremost, it is the parties which must bear responsibility for considering the suitability of this approach. It is rather dispiriting that the parties are often ignorant of the content of this concept and the potential application of this approach to possible disputes that can theoretically be predicted in the context of a specific contractual relationship. On the other hand, it is the parties that logically can and often should express their will to embrace the limits of such decision making, although this is rare in practice. This is clearly a procedure that is uncommon in domestic and international practice and is an exception to the otherwise general rule of decision making according to applicable law.

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Czech (& Central European) Yearbook of Arbitration

Alexander J. Bělohlávek

IV. Difference between Decision Making Following the Principles of Equity (Ex Aequo et Bono) and the Amiable Compositeur Procedure 2.12.

The idea of the interchangeability or overlapping of the ex aequo et bono and amiable compositeur approaches is not universally accepted. Indeed, some doctrines insist on a strict distinction between the terms ex aequo et bono and amiable compositeur. Rubino-Sammartano7 came up with a radical differentiation. With reference to the semantic meaning and origin of the concept of amiable compositeur, he concludes that the settlement of a dispute where the parties empower a particular entity (an arbitrator) to act as an amiable compositeur is not decision making in the strict sense and the whole process of arbitration thus loses its adversary character, but is a sort of quasi-settlement proceeding. The term compositeur is derived from the word composition, which is still used in many languages8 to mean agree or settle, rather than decide. An arbitrator acting as an amiable compositeur is thus viewed as a representative authorized to resolve the dispute. It is important not to lose sight of the fact that some jurisdictions may allow for such a construct, even if exceptionally, referring for example to the concept under Italian law9 known as arbitrato irrituale,10 along with arbitraje informal and impropio o libre Mauro Rubino-Sammartano, “Amiable Compositeur” (Joint Mandate to Settle) and Ex Bono et Aequo (Discretional Authority to Mitigate Strict Law): Apparent Synonyms Revisited, 9 (1) JIA 5-16 (1992). 8 In Italian: composizione or transazione, in English: composition or settlement, in French: composition or transaction. 9 Renzo Morera, New Trends of Arbitration in Italy, 2 CROATIAN ARBITRATION YEARBOOK 47-54 (1995). 10 Cf., for example, ALEXANDER BĚLOHLÁVEK, ROZHODČÍ ŘÍZENÍ, ORDRE PUBLIC A TRESTNÍ PRÁVO (Arbitration, Ordre Public and Criminal Law), Praha: C. H. Beck marg. 323-324 (2008). This is a case where the arbitrators, in the form of an arbitration agreement as an enforceable instrument, confirm the parties’ agreement on the content of their obligations, e.g. the equivalent of an award with a contractually agreed content (cf. analogous treatment under the ZPOG) or the issuance of an arbitral award consistent with the content of the parties’ agreement at the request of the participants in the arbitration proceedings. See the rules contained in Article 808 ter of the Italian Code of Civil Procedure (approximate translation, cit.): “Article 80 ter (Arbitrato Irrituale) – The parties may establish in writing that the dispute be settled by the arbitrators through a contractual determination as an exception to the provision of Article 824-bis. Failing this, the provisions of this Title shall apply. The contractual award may be set aside by the competent court according to the provisions of Book I: (1) if the arbitration agreement is invalid or the arbitrators have decided questions exceeding their limits and the relevant objection has been raised during the arbitral proceedings; (2) if the arbitrators have not been appointed in 7

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2.13.

2.14.

in Spain, although it is questionable to what extent these cases could be classified as arbitration in the true sense of the word. This is an example of just how poorly definable these concepts are in general. In support of his theory, Rubino-Sammartano cites an Italian court decision in Calaresu v. Pintus, in which the difference between the two concepts is defined as follows (cit.): The expression “arbitrators amiables compositeurs” refers to a notion which is wider than that of an arbitrator acting under aequitas, dealt with by Section 822 of the [Italian] Rules of Civil Procedure.11 The former [amiable compositeur] grants the authority to settle, an authority which arbitrators under aequitas do not possess.12 Rubino-Sammartano himself is aware of the logical issue of how the term amiable compositeur will be construed in cases where the legal system precludes the conferral of power on an arbitrator to settle a dispute. The decision (also handed down by an Italian court) in Parisi v. Parisi notes that the fact that arbitrators must decide as amiables compositeurs does not exclude that one envisages an arbitro rituale (i.e. a procedural arbitration) when it appears that the parties have had the intention to grant the authority to the arbitrators to decide according to aequitas. Such authority may be granted under Section 822 of the Italian Rules of Civil Procedure with any expression, without detracting from the judicial character of the decision to be issued.13

the form and manner contemplated by the arbitration agreement; (3) if the award has been rendered by a person which could not be appointed as arbitrator according to Article 812; (4) if the arbitrators have not applied the rules prescribed by the parties as a condition for the validity of the award; (5) if the principle of contradictory proceedings (principio del contraddittorio) has not been respected in the arbitral proceedings. Article 825 is not applicable to the contractual award.” 11 Arbitration in Italy is regulated by Articles 832 to 838 of the Code of Civil Procedure. These rules relate to international arbitration as newly conceived by the legislative reform of 1994. Under Italian law, international arbitration is a proceeding where, at the time the arbitration agreement is signed, at least one of the parties is resident or has its principal place of business outside Italy. The last major amendment in Italy was made in February 2006 by Act No 40 (D.Lgs.40/2006). 11 This new legislation saw arbitration incorporated into the new Article 806 et seq. of the Italian Code of Civil Procedure, which essentially mirrors the general principles laid down in this regulation for judicial proceedings (e.g. for court litigation). Cf., for example, Francesco Bianchi, Italy – A significant move towards internationalism, 24 (8) INTERNATIONAL BUSINESS LAW 391 (1996). 12 Judgment of the Corte di appelo Cagliari [ITA] of 29 April 1960, published in: (18) REP. FORO IT. 161ff. (1961); see also Mauro Rubino-Sammartano, supra note 7, at 5-16.. 13 Judgment of the Corte di appelo di Messina [ITA] of 24 October 1956, published in: REP. FORO IT., 174, Case-law Reference Number 24 (1957).

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Czech (& Central European) Yearbook of Arbitration

Alexander J. Bělohlávek

2.15.

International institutions involved in arbitration are also aware of the problem with the definition of the terms amiable compositeur and ex aequo et bono. A working group was set up at the ICC in 200514 to: (i) identify the basic characteristics of the concepts in question, and (ii) study the role of arbitrators making decisions based on principles of equity (whether in relation to questions of jurisdiction,15 procedures or issues related to the assessment of the merits). A final report has yet to be published.

V. Decision Making as Amiable Compositeur 2.16.

2.17.

The concept of decision making as an amiable compositeur originates in French law. The possibility of using this method of decision making should be examined from the perspective of the legal system at the place (seat) of the proceedings and the legal system at the place of enforcement of the arbitral award. Decision making solely as an amiable compositeur exists only in the country of origin of this concept, i.e. France. Under French law this is a procedure where the arbitrators are to make decisions according to the law and legal principles, but they are entitled to alter the effects of the application of specific legal norms (limitation, damages, etc.). Equity (equita) is only one of the dimensions of such decision making. This concept can be described as a process in search of the law and equity in order to find a solution that is as equitable as possible. It should be emphasized, however, that in many doctrines and other jurisdictions this approach has undergone a significant transformation from the original French concept. This concept evolved from amicabilis compositor, which was part of canon law. This concept of canon law covered situations when arbitrators made decisions more as a conciliator or mediator than as an authoritatively ruling judge. This concept also has certain roots dating back to the second half of the 17th century, when arbitrators were not bound in their decision making by rules of either substantive or procedural law. This concept was first enacted in the Napoleonic Code (CoCiv) and later in the French Procedural Code of 1806.16 Headed by Edouard Bertrand [FRA] and Ronald King [GBR]. It should be noted that in some jurisdictions the issue of authority (jurisdiction) is regarded as a subject of substantive law, i.e. as part of the merits of the case. This can be attributed, in particular, to the influence of common law, to which the concept inherently pertains and which, in many respects, is reflected in a number of approaches applied in proceedings before the ICC International Court of Arbitration. 16 French lex arbitri rules are rather fragmented. While the arbitration agreement itself, its effects, the conditions for the conclusion thereof, etc., are regulated by substantive law (CoCiv [FRA]), procedural issues related to arbitration are subject to civil procedural rules. 14 15

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2.18.

2.19.

The issue of the nature of decision making as an amiable compositeur was addressed, for example, by the Court of Cassation in France (Cass.)17 in its judgment of 15 February 2001 (The Halbout & société Matenec HG v. Epoux Hanin). This judgment emphasized the obligation of an arbitrator sitting as an amiable compositeur to reach a decision with reference to principles of equity rather than legal principles. In the arbitration proceedings that preceded this decision of the French Court of Cassation, the arbitral tribunal, referring to French legislation, stated that the request for arbitration (statement of claim) was inadmissible. The plaintiff challenged this finding, arguing that the arbitral tribunal had failed to respect the task entrusted to it by the parties, i.e. to act as an amiable compositeur. In its ruling, the French Court of Cassation responded to this issue by concluding that the arbitral tribunal’s decision had been based solely on legal arguments, without clarifying whether the cited regulations were in accordance with principles of equity. Accordance with such principles was required of it as an amiable compositeur under the arbitration agreement. It follows from that ruling that an arbitrator sitting as an amiable compositeur has a choice. The arbitrator can either proceed in accordance with the principles of equity, if they are not contrary to public policy, or can apply legislation, if the law in question in the case at hand complies with the principles of equity. Based on this articulated French opinion, the arbitrator’s mandate to act as an amiable compositeur does not mean unlimited freedom; rather, under such a mandate, the arbitrator is expressly bound by the parties to proceed in a manner facilitating an assessment of the merits. This statement shows that the original French concept characterizes the amiable compositeur approach as a way of forming legal conclusions on the merits, rather than as a procedural approach. In this respect, it is a finding procedure. The application of principles of equity, albeit in accordance with certain international doctrines and the concepts of certain other countries, transformed this traditional French approach to a procedural level approaching the search for a settlement between the parties. In the traditional concept, the amiable compositeur in certain respects modifies the strict legal rules applicable to a particular contractual relationship by factoring in equity. Currently, in some countries the concept of decision making as an amiable compositeur is genuinely close to decision making ex aequo et bono in the sense of the increasing discretion that arbitrators have to exclude the impact of applicable legal rules and decide on a dispute according to the principles of equity. This 17

Here, a decision of the Second Civil Chamber.

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situation is related to the problem outlined above, namely the lack of a uniform or even a binding definition of the term or a definition of the powers and duties of arbitrators making decisions in this way. The interpretations existing in individual states vary considerably. Interpretations range from a situation in which the arbitrators are bound by mandatory lex causae standards (arbitrators are first required to determine applicable law under which they are to resolve a dispute, in which respect they are only entitled to alleviate any harshness, or perhaps injustice, of such regulations) to a situation where the concept of amiable compositeur is identified with decision making ex aequo et bono. In the latter of these extreme cases, arbitrators are not bound by any rules, and decisions therefore solely depend on their perception of what is fair in relation to the dispute.

VI. Permissibility of Dépeçage (Splitting) in Consequence of a Partial Authorization to Decide Following the Principles of Equity or as Amiable Compositeur 2.20.

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In connection with decision making according to the principles of equity, there is also the question of whether such authorization necessarily automatically applies to all aspects of the dispute or whether it may be agreed that only certain issues regarding the merits of the dispute will be resolved while others will be subject to chosen or statutorily established governing substantive law. The concept of dépeçage tends to pertain to private international law, where the laws governing the same relationship are split, with different parts of the relationship subject to different governing law. Allowing for the fact that the parties may agree to resolve a decision with only part of a dispute according to the principles of equity, this is essentially a special kind of the dépeçage traditionally applied in private international law. Although certain opinions have been voiced in literature18 claiming that this kind of authorization, and consequently partial choice of law, is possible, for example Czech lex arbitri rules do not explicitly allow it, notwithstanding the fact that Section 25(3) of the Arbitration Act [CZE]19 does not currently contain any, even implied, ban on such procedure. 18 TAIDA BEGIC, APPLICABLE LAW IN INTERNATIONAL INVESTMENT DISPUTES, Den Haag: Eleven international publishing (2005). 19 ArbAct [CZE] (approximate translation, cit.): “Section 25 [Making the arbitral award and reasons]: (1) An arbitral award shall be adopted by a majority of arbitrators, shall be made in writing and shall be signed by at least a majority of arbitrators. The operative part

2.21.

2.22.

If we accept that this is analogous to the determination of governing law in private international law, we must evidently also admit the possibility of the partial authorization of arbitrators to make decisions in accordance with the principles of equity. In the author’s opinion, however, decision making according to the principles of equity and the authorization of arbitrators to consider the merits of a dispute are not the same as determining applicable law by choice. Applicable law should be determined in all cases, regardless of how the arbitrators approach the substantive definition of their obligation to resolve the dispute. This applies whether their basis is that only applicable law defines the limits within the principles of which they determine the qualitative and quantitative scope of subjective rights or whether applicable law only defines the outer boundaries of this space in the sense of ordre public limits. Despite the absence of express rules on the possibility of or, conversely, ban on partial authorization to make decisions according to the principles of equity, the author believes that such a procedure is not possible. Nevertheless, it is conceivable for the parties to achieve an analogous effect, as in the case of a certain dépeçage where arbitrators are authorized to hear a case according to the principles of equity only in relation to part of a dispute by means of a suitable arrangement on dispute resolution procedure, i.e. in the sense of a procedural agreement on the procedure to be followed in proceedings. In practice, it is possible to establish a specific mechanism for the assessment of preliminary questions, etc. If we were to admit (even theoretically) the partial authorization of arbitrators to make decisions according to the principles of equity (or as an amiable compositeur in lex arbitri systems which allow for such a method of decision making), then there would undoubtedly be material or practical problems associated with this procedure as the individual parts of contractual legal relationships are interlinked and/or of the arbitral award shall be clear and unambiguous. (2) The arbitral award shall be reasoned unless the parties agree to dispense with reasons; this shall also apply to any arbitral award rendered pursuant to Section 24(2). An arbitral award rendered in a dispute arising from a consumer contract shall always contain reasons and instructions regarding the right to file a motion with a court to annul the award. (3) When making an award, arbitrators shall apply substantive law applicable to the dispute; they may, however, resolve the dispute according to the rules of equity, but only if the parties explicitly authorize them to. In disputes arising from consumer contracts, arbitrators shall always abide by consumer protection laws and regulations.” ArbAct [CZE] (approximate translation, cit.): “Section 24 [Settlement of the dispute] (1) Arbitrators shall try to persuade the parties to agree on an amicable settlement to the dispute in the course of the arbitral proceedings. (2) If requested by the parties, the settlement may be concluded in the form of an arbitral award.”

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2.23.

interrelated. There could also be doubts about the equal status of the parties in such proceedings. Such a conceivable scenario could occur as follows. In the first stage, one of the parties, in deciding according to the principles of equity in the assessment of a particular legal act, is excused for non-compliance with formal requirements defined by applicable substantive law (or where the validity of such a legal act is recognized despite its flaws). In the second stage, in the assessment of the legitimacy of claims arising from that legal act, those claims are acknowledged in accordance with the law and as a result of the need to apply governing substantive law, even if such claims are controversial in terms of equity. Clearly, such a decision can hardly be described as equitable. Similarly, it is not desirable for the participants in arbitration to speculate on the way the individual parts of the decision-making process are defined. In practice, often even in countries where the arbitrator as an amiable compositeur or indeed, as an arbitrator in accordance with the principles of equity need not use law in force as a basis, the arbitrators in this type of decision making refer and rely on otherwise applicable substantive law. This procedure logically strengthens the predictability and unambiguity of decision making while limiting the risk attached to decisions based on specific arbitrators’ purely subjective notions of equity, regardless of the circumstances of the case. In particular, this applies to the parties’ intentions when entering into a contractual legal relationship. The following situation is likewise conceivable. An arbitrator, sitting as an amiable compositeur or deciding according to the principles of equity, considers whether a dispute is to be resolved praeter legem (while respecting the principles of ordre public) or whether, in the absence of a choice of law by the parties, substantive [national] law is to be applied.20

VII. Power of the Arbitrator to Modify the Agreement of the Parties 2.24.

Another issue associated with decision making as an amiable compositeur, and to some extent in relation to decision making For example, in the arbitral award in ICC Case No 3742 of 1983, the tribunal, acting as an amiable compositeur, used its authorization to determine governing law. Rather than determining such law on the basis of conflict-of-laws rules, it proceeded according to the voie directe doctrine and applied the law which had the closest connection with the parties to the dispute, considering this solution in the framework of its powers to be equitable in the case. The relevant procedures can therefore also be reduced in disputes with an international dimension to the process of determining the governing law of the dispute. 20

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according to the principles of equity, is whether and to what extent an arbitrator may deviate from or modify the parties’ agreement on standards applicable to a decision on the merits. An exception to the general rule that an arbitrator is bound by the parties’ agreement could be the parties’ express authorization granted to the arbitral tribunal to modify or to refrain from applying specific provisions of the parties’ agreement (contract). Such an arrangement could conceivably be interpreted as a change in the existing contractual legal relationship between the parties. Likewise, it is inferred that arbitrators may derogate from the application of specific contractual provisions in cases where it follows from the circumstances existing at the time of the agreement that the parties could not foresee certain circumstances and/or events that occur during the lifetime of the contract in respect of which the dispute takes place. Under such conditions, the continental doctrine allows arbitrators in international disputes to depart from the express provisions of an agreement between the parties and adapt them to the altered conditions. The possibility of the modification of the parties’ agreement by an arbitrator acting as an amiable compositeur and to a certain extent in decision making according to the principles of equity has previously been assessed in various disputes addressed, in particular, in proceedings before the ICC Court.21 See, for instance, the following ICC rulings: ¾ In ICC arbitral award case No 3267 of 197921 the tribunal concluded that although some legal writers have expressed the opinion that the arbitrators sitting as amiables compositeurs may disregard the provisions of the agreement between the parties, this view has not been accepted in international arbitration. On the contrary, it is a generally accepted principle in international commercial arbitration that the paramount duty of the arbitrator, even the amiable compositeur, is to apply [author’s note – in particular] the contract of the parties, unless it is shown that the provisions relied on are clearly against the true intent of the parties or violate a basic commonly accepted principle of public policy. In the view of the arbitral tribunal, this principle is a basic requirement for the security of international trade. It is furthermore binding in ICC arbitrations, in view of Article 13 of ICC Rules [NB subsequently Article 17 of the ICC Rules (1998 version) and currently Article 21 of the ICC Rules (2012 version)], that makes it clearly a duty to ICC arbitrators to apply the provisions of the contract in any case, even if they have the powers of amiables compositeurs”. In its award, the arbitral tribunal also held that “the arbitrator sitting as amiable compositeur is entitled to disregard legal or contractual rights of a party when the insistence on such rights amounts to an abuse thereof”. These proceedings concerned a dispute between a Mexican construction company and a Belgian company. Published, for example, in: (5) JDI CLUNET 962-966 (1980) (commentary by Yves Derain, Ibid. at 966-970, and thereafter repeatedly referenced elsewhere). The case in question is closely related to ICC AA No 3316. ¾ A similar situation was discussed in ICC AA No 3316, in which the tribunal expressed the view that arbitrators acting as amiables compositeurs may, to some extent, modify the

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2.25.

Such a possibility cannot in any way be confused with the modification of any agreement between the parties on governing law. Likewise, by no means can an agreement between the parties on the standard applicable to the assessment of the merits be interpreted extensively enough to establish the arbitrator’s authority to hear a case ex aequo et bono or as an amiable compositeur. Such an approach requires the express agreement of the parties or an arrangement which does not leave any doubt about the existence of their consensus and the content of such an agreement. Any modification by the arbitrator in this regard would be inadmissible.22

VIII. Decision Making Following the Principles of Equity (Ex Aequo et Bono) and Connection with Valid Law 2.26.

Unlike decision making as an amiable compositeur, which should mainly establish limits of applicability of the applicable law and the method of application thereof for purposes of a fair hearing, ex aequo et bono is grasped in international practice as decision making praeter legem, in the domain of principles of morality and equity. In cases of equity, the focus is on the arbitrator’s subjective sense of justice. The equitability of the decision must be considered and certain scales of values for the specific case need to be created. This is done so that the arbitrator acts not only as a person authoritatively deciding on the dispute in adversary finding proceedings but also, to some extent, as a quasi-legislator, as creating rules [solely] applicable to the particular case on the basis of general moral principles in a legal context. This method of dispute resolution in general seems to be suitable for recurrent and long-term relationships. This method also seems suitable between entities where mutual cooperation can be expected in the future, and for this reason these entities prefer a solution grounded in such principles and are interested in resolving a dispute rather than assessing it in purely normative terms without taking into account all provisions of an agreement between the parties. However, such modifications must not result in the abuse of a right and may not exceed the powers conferred on an arbitrator. This invites the question (to which this AA provides no answer) as to how the phrase “to some extent” is to be interpreted. It can be concluded, with the support of published opinions, that, it is in keeping with the amiable compositeur doctrine for arbitrators themselves to determine the scope and method of modification in accordance with their understanding of what would be an equitable solution in each case. Another award which deals with this issue is a 1982 AA also rendered in ICC proceedings (under Number 3938). 22 In recent international practice, see, for example, ICC AA No ICC 17397 of 5 April 2012, which, with regard to this issue, is annotated below.

the interdependencies. In this case, a higher level of flexibility is certainly desirable. Likewise, this decision-making method is suitable for disputes concerning matters which applicable law does not comprehensively cover and therefore does not allow for a case to be resolved in its entirety.

IX. Unambiguity of the Authorization Granted to the Arbitrators to Make Decisions Following the Principles of Equity 2.27.

A necessary condition for decision making according to the principles of equity (and even as an amiable compositeur) is explicit authorization granted by the parties. Such authorization must be clear, understandable and unambiguous. There must be no doubt that the parties had intended to empower the arbitrator to reach a decision in accordance with the principles of equity.23 See, for instance, the following rulings in international practice: ¾ ICC AA No 3380 of 29 November 1980. This was a dispute between a Syrian and an Italian company. The arbitration clause read as follows (approximate translation, cit.): “Arbitration shall be held at Geneva and shall judge according to the general principles of law and justice.” The last part was added by hand – the original text, according to which the arbitrators were to decide ex aequo et bono, was crossed through. In another provision (Article 25), the contract contained the choice of Syrian law as the governing law. The claimant inferred that the arrangements on how to resolve the dispute constituted a special provision in respect of the article containing the choice of law, and, although not ideally formulated, it should be correctly interpreted that the general principles of law and justice mean decision making as an amiable compositeur as well as decision making on the basis of equity. The respondent countered by arguing that the contract does not mention the words amiable compositeur or equity, and therefore it is impossible to arrive at a conclusion other than that the parties had in mind arbitration in accordance with the choice of [substantive] law. According to the tribunal, the wording of the arbitration clause precluded the unambiguous conclusion that the parties had actually agreed that the arbitrators would take decisions as amiables compositeurs. (by analogy, see also ICC AA No 3380; cf., for example, Osman Fiali, Salama Saber, Les méthodes de détermination du droit applicable par l´arbitre: vers un rattachement de la „voie directe” à la méthode conflictuelle, 21 (2) ASA BULLETIN 272-285 (2003). As regards the concept of ex aequo et bono, due to the fact that it had been crossed out, the arbitral tribunal did not consider its interpretation to be relevant and concluded that none of the versions presented by the parties could be confirmed, and therefore the arbitration clause must be interpreted in accordance with general rules on interpretation (i.e. both a grammatical interpretation and assessment of the entire context of the contract). Finally, the arbitral tribunal came to the conclusion that it was necessary to take into account both the provisions and that the agreement was exclusively governed without restriction by Syrian law, subject to general principles of law and equity. These general principles include prima facie principles derived from Syrian law, as well as principles developed in international arbitration. It cannot be ruled out that these principles are partly consistent with trade practice, which

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In terms of an agreement on authorization to make decisions according to the principles of equity, it is not principally acceptable to broadly interpret arrangements where the parties authorize arbitrators, for example, to take into account trade practices and legal principles or to consider certain standards which are not of a generally binding nature. Such arrangements cannot be regarded as an agreement according to the principles of equity. In this case, the authorization must not raise doubts about its content.24 the arbitrators must take into account in each case. According to the tribunal, this conclusion is also in keeping with the positions of the parties, as both had referred to standards of international arbitration and certain general principles during the hearing of the case. This ruling was published in: (i) (7) Y. B. COM. ARB. 116-118 (P. Sanders ed., 1982), and (ii) 108 (4) JDI CLUNET 928–930 (1981) (the note on the ruling by Yves Derains in the last-cited source on 930–931). ¾ Judgment of the English Court of Appeal (GBR-ENG) in Mamidoil-Jetoil Greek Petroleum Co. SA v. Okta Crude Oil Refinery AD, 2 LLOYD’S REP 76 (2001). This case concerned a ten-year contract under which the supply prices were only established for one year. In the first few years, the price was determined by agreement of the parties. Following a change of owner at one party, attempts to reach an agreement failed. The contract contained a general arbitration clause in the sense that all disputes that were not resolved amicably would be submitted to an arbitral institution for settlement. The question was whether the contract was still valid under these conditions and, if so, what the mechanism was to resolve the absence of an agreement on the price. In the first instance, the court ruled that the contract was invalid. That decision was annulled by the court of appeal, which stated that the contract remained valid and held that the arbitration clause was a contractual mechanism for determining a reasonable price under all circumstances, even though the contract itself contained no criteria or guidance for determining the price. According to that ruling, the arbitrator has the authority to determine a reasonable price should the parties fail to reach an agreement. According to the arbitral tribunal, the arbitration clause should have included the specific exclusion of such a solution to these issues by the arbitrator if this was the wish of the parties. Arbitrators exercising jurisdiction within the meaning of this decision adjudicate, but they act in accordance with the law in all respects. Arbitrators may derogate from legal principles only if they are expressly authorized by the parties to do so. According to this English judgment (cit.): “This type of arbitration is then called ‘ex aequo et bono’ or ‘equity’ or it is said that the tribunal adjudicates as ‘amiable compositeur’”. Evidently, English doctrine does not, in principle, distinguish between the concepts amiable compositeur and ex aequo et bono. However, this ruling is more significant from the perspective of the substantive scope of the arbitration agreement, as regards the arbitrators’ authorization to supplement missing content or to replace an expression of will in the instantiation of a contractual arrangement, unless this is explicitly precluded. 24 In international practice, we might refer to the arbitral award rendered in ICC proceedings in Case ICC 17397 of 5 April 2012, where the sole arbitrator concluded that the wording of the original Italian version of the arbitration clause (cit.) “I giudizi arbitrari decidono secondo i principi della giustizia,[…]” was not an explicit authorization for the arbitrator to assess the case solely according to principles of equity. He inferred that the provision was neither unambiguous nor sufficient. The arbitrator pointed out that the corresponding rules (here, Article 17(3) of the ICC Rules [1998 version]) constituted an

X. Decision Making outside the Law versus Decision Making within a Particular Legal System 2.28.

2.29.

2.30.

The definition of the content of the concept of ex aequo et bono is complicated by the fact that, in an international environment, at least part of the theory strictly distinguishes between decision making ex aequo et bono and decision making on the basis of equity. The first case (decision making only similar to ex aequo et bono) goes beyond the scope of applicable law. The approach of decision making according to equity is based on decision making praeter legem, i.e. in accordance with the law and within the limits of a legal system. This distinction is generally justified by the fact that justice, in the sense of equity, is part of applicable law, and the principles of equity associated with the concept of decision making ex aequo et bono are based on moral rules and social and political reality, i.e. the reality outside the framework of valid legal norms. Some experts rely on this strict distinction, in which arbitrators making decisions according to equity do not seek a simple fair solution, but a fair solution based on applicable law, as opposed to decision making ex aequo et bono. The latter essentially creates new relationships and there is no limitation imposed by existing legal rights and obligations. If we were to identify with this interpretation, then it would have to be exception and that the application of this exception required the parties’ express authorization, which in this case had not been granted under the given wording. The arbitrator took into account that the binding wording of the arbitration clause was in Italian. The term used in this text, i.e. “giustizia”, must be literally translated as “law” (“Recht” in German, as the language of proceedings negotiated by the parties only after the conclusion of the arbitration agreement), and the explicit agreement of the parties regarding the arbitrator’s authorization to take decisions according to principles of equity cannot be deduced from this formulation. The broad interpretation of such an arrangement is therefore inadmissible. Although in the statement of reasons the arbitrator observed that there was no need for the parties to explicitly apply the text used in the corresponding regulations (rules) applicable to the proceedings and admitting the possibility of such arrangements between the parties, the arbitration clause must make it clear that the parties have consciously authorized an arbitrator to engage in such decision making. However, it should be noted that the ICC AA cited here appears to be very strict. Also, the analysis of the agreement between the parties on the authorization of the arbitrators to make decisions according to the principles of equity should encompass a rigorous interpretation of the parties’ intention at the time the arbitration agreement was concluded. Presumably, other tribunals could arrive at different conclusions, particularly if they comprise arbitrators more focused on Anglo-Saxon law (especially common-law jurisdictions and traditions) or on the Francophone area. Nevertheless, in general it is necessary to demand, particularly in cases where the interpretation of the content of the arbitration clause between the parties is disputed, sufficient unambiguity as to the parties’ intentions regarding decision making ex aequo et bono.

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2.31.

2.32.

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noted that decision making according to equity is rather similar to the effect of an arbitrator sitting as an amiable compositeur. Likewise, however, there are opinions arguing that the terms equity and ex aequo et bono are equivalent and even synonymous. A variant of this doctrine can be found in views under which general authorization (discretion) granted to arbitrators for decision making ex aequo et bono is comparable to the discretionary powers entrusted to judges in the common-law system when applying equity. Considering the interpenetration of these methods, dwelling on the strictly formal differentiation of these approaches in terms of the content of the power to adjudicate ex aequo et bono is evidently inappropriate. The real difference cannot be judged according to how decision making is formally conceived; rather, in each case the issue of how the arbitrators or judges effectively use the discretionary power vested in them should be addressed. It could be argued that plugging gaps in the law25 in the application of equity and that decision making ex aequo et bono focused on achieving fairness between the parties are only two different levels of the same process. Therefore, it would be counterproductive to look for a dividing line between them. In cases where the parties authorize the arbitrators to make decisions ex aequo et bono, the arbitral award represents an interconnected compact summary of decisions made (strictly formally) on the basis of equity and decisions made outside the framework of applicable law. If we were to insist on a formal division of equity within the legal system and equity outside the legal system, then this would be to the detriment of the objective pursued by both concepts, i.e. the attainment of an equitable decision with regard to the individual circumstances of each case. The efficiency and effectiveness of arbitration are best served by an approach examining and evaluating not whether the arbitrators exercise their powers on the basis of equity or ex aequo et bono but on how the decision making actually takes place and whether it is in accordance with the limits of the discretionary powers assigned to the arbitrators. Classic cases of decision making ex aequo et bono are situations where the arbitral tribunal disregards, for example, minor overruns or the lack of formal procedure required by governing law for a particular legal act, where it considers such matters to be unduly harsh and unnecessarily formalistic compared to normal trade practices. This may be a situation where such non-compliance with a deadline or procedure occurs for 25 Cf., for example, Klaus Peter Berger, Power of Arbitrators to Fill Gaps and Revise Contracts to Make Sense, 17 (1) ARB. INT. 1-17 (2001).

2.33.

2.34.

reasons beyond the control of a party (e.g. a technical malfunction in transmission equipment used to transmit a message containing a legal act, resulting in the dispatch but not the delivery thereof, in conjunction with provisions of applicable substantive law not normally allowing for relief and reinstatement or the waiver of a lack of form). Alternatively, a similar situation could occur where the relevant substantive law associates a missed deadline or lack of form with the extinguishment of a right, but the tribunal concludes that the time by which the deadline was missed was so minimal that depriving the party of its claim would be contrary to equitable settlement between the parties. It is conceivable that in such a case the arbitral tribunal will not examine in detail the reason for the missed deadline or non-observance of procedure and will eliminate the consequences of such default implied by substantive law without further action. Similarly, the arbitral tribunal, in decision making according to the principles of equity, may decide on the validity of a legal act which contains the clear and unequivocal intention of the parties but fails to meet all the formal requirements for this legal act under applicable lex causae. In cases where arbitrators plug gaps in a law26 in their decision making, this process tends to be viewed as acting in accordance with and on the basis of the law, whereas arbitrators taking decisions ex aequo et bono do not fill in gaps in a law and the exercise of their powers is not related at all to written law. The opinion that decision making praeter legem exists where the discretionary powers of arbitrators do not fill in gaps in a law is based on the following facts: (i) arbitrators taking decisions ex aequo et bono exercise their powers on the basis of objective concepts of justice as embedded in business customs and in procedures inherent in trade practices or on the basis of their subjective opinions and (ii) in both cases the arbitrators need not act/decide according to applicable law. In such cases, arbitrators may well act not only outside, but even in conflict with, the legal framework. This conclusion is highly questionable if arbitrators, in the interests of equity, fill in the gaps in

It is quite clearly possible to talk of gaps in a law. It is rather more difficult to discuss gaps in the legal system. In some quarters, it is opined that gaps in the legal system do not exist. The author of this publication shares this opinion. The legal framework of a solution is merely expressed by means of a combination of different methods and in different ways. Thus, for example, gaps in a law logically exist, because the law itself cannot react to every factual and legal situation in a model manner. Due to its abstractness, it may, of course, encounter a factual and legal situation which it fails to cover perfectly. In these cases, analogy, the use of subsidiary legislation, the application of the principles of specific rules or legal principles, the reliance on habitual practices etc., may be considered.

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the law or arrive at an equitable solution outside the framework of applicable rules and in either case exercise powers aimed at the same outcome, i.e. to provide the parties with equal and fair treatment and to reach an equitable solution.

XI. Contents of Decision Making Following the Principles of Equity Depending on the Scope and Manner of Exercising the Authorization 2.35.

In practice, it is very difficult to determine the boundary or exact moment when an arbitrator leaves the domain of applicable law and begins to act outside that framework. The essential factor is determining when, why and how the arbitrator exercises his powers in the context in which they are applied, always in light of the nature of the powers entrusted to him and in the context of the impact of decisions on the relations between the parties. By no means, however, can the limit demarcating the arbitrator’s powers in the hearing of a dispute be determined by the transition between equity and decision making ex aequo et bono. Instead, it is migratory, depending on the specific circumstances, and must always be assessed individually. Cases which can definitely be said to be inside or outside the legal system exclusively lie on the very ends of the imaginary line between equity and decision making ex aequo et bono. For example, an interpretation of a simple inaccuracy in a law or in a contract is in keeping with the legal system. On the contrary, a decision protecting interests and/or granting entitlements with no basis in law is outside the legal system. Most cases are not to be found on either of these extreme ends, and it is difficult to decide whether they fill in gaps in a law or whether they are decisions arising outside the legal framework. The exercise of an arbitrator’s powers throughout this spectrum does not place decision making ex aequo et bono at odds with the law. Rather, the exercise of these powers should guarantee that the law will be applied in accordance with the parties’ practices and with the trade practices customary in contractual relations between the parties. Similarly, this method of decision making ensures continuity rather than conflict between the application of legal regulations in the strict sense and the functioning of discretionary powers extending beyond the law.

XII. Prohibition of Arbitrary Conduct 2.36. 44 |

Decision making according to the principles of equity in no way means that arbitrators, when making decisions according to principles of equity, are entitled to proceed according to their own whim and

2.37.

without any rules. In the narrowest sense, the external boundaries of their powers mean the need or obligation of arbitrators to respect the parties’ established practices. In the broadest sense, these boundaries mean the obligation to take account of commercial habits and practices generally applicable to a specific sector. The duty to respect agreements between the parties has been discussed above. It is assumed that if a decision is to be fair, it must also be equitable in light of the background of the parties’ claims. Likewise, a decision may be fair only if its consequences are fair in light of the parties’ customs and practices relating to their interests (claims). The solution adopted by the arbitrators must be correct and take into account the context of the whole dispute rather than just the arbitrator’s subjective feelings and beliefs about a particular concept of equity.

XIII. Principles of Decision Making Following the Principles of Equity 2.38.

2.39.

Czech (& Central European) Yearbook of Arbitration

Application of Law in Arbitration, Ex Aequo et Bono and Amiable Compositeur

Decision making according to the principles of equity should always be based on the following: (i) each case must be assessed specifically and individually, not abstractly, and always in the context of mutual relations between the parties; (ii) the decision must be equitable, having regard to the circumstances of the relationship between the parties; (iii) the dispute must be considered in the broader context of customs, practices and rules, including regulations concerning the relationship between the parties; (iv) the actual proceedings must be fast and efficient and (v) the procedure should lead to a result which is transparent and which will maintain the equality of the parties. Decision making according to the principles of equity is focused on seeking practical or feasible solutions to complex problems that have arisen in the relationship between the parties without being strictly tied to the use or exclusion of applicable rules. The arbitrators, based on mature reflection and a consideration of all circumstances, decide on the most suitable rules or concepts of equity to resolve the dispute. In their decision, the arbitrators should rely on the facts known to them, the established practices of the parties and the applicable trade practices. After considering all options, it is possible that the application of legal regulations, i.e. a decision under applicable law, is found to be the most equitable. Likewise, decision making according to the principles of equity includes the application of, or at least consideration for, the general principles of law such as contractual autonomy. | 45

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Alexander J. Bělohlávek

XIV. Predictability of Decisions 2.40.

Decisions according to the principles of equity are sometimes criticized by opponents for their alleged unpredictability, unambiguity and the use of a particular arbitrator’s subjective notions of equity. If the parties share this concern, then the participants may prevent what they view as the subjective application of the principles of equity by an arbitrator. They do this by exercising their right to establish certain criteria for the arbitral tribunal, which are to be respected in the adjudication of the dispute or which form the basis for the procedure to be followed. For example, it is possible to refer to well-established practices of decision making according to the principles of equity as developed and functional in a particular legal system or sector. It is also possible to refer to a particular theory of justice or, in a mandate, to directly set arbitrators standards with a view to providing the arbitral tribunal with guidance in its decision making. This procedure is not inconsistent with the rules of arbitration applicable, for example, in the Czech Republic, as well as other legal systems and modern lex arbitri provisions, depending on the specific content of the agreement between the parties, which the tribunal should respect in its decision making. Such arrangements could be classified either as a substantive arrangement between the parties modifying their contractual relationship (in which case the arbitrators are always bound by the parties’ agreement) or as an agreement concluded by the parties on the conduct of arbitral proceedings, enabling the parties to negotiate the procedure according to which the arbitrators are to conduct the entire proceedings. The process of decision making on the outcome of a dispute is part of the procedure. In general, it can be stated that the systematic repetition of decisions according to the principles of equity may ultimately contribute to the creation of some kind of new rules that will be binding upon arbitrators in this type of decision making. Nevertheless, the truth of the matter is that, throughout the effect of the current ArbAct, no such rules have been created, nor has any expert discussion been held on the content of a mandate to make decisions according to the principles of equity. Rather, it is impossible to ignore the fact that this procedure, in respect of certain standard arbitration clauses, has been abused in such a manner that in certain proceedings the procedures pertaining to adversary proceedings, including the obligation to raise claims and to furnish and take evidence, have been disregarded. However, decision making according to the principles of equity is often much more challenging than decision making according to substantive law. It places high demands

on both the arbitrator and the procedure in the proceedings, in which maximum care must be taken to balance the rights of the parties and find a benchmark for a fair decision. The principles selected by arbitrators when deciding on the merits should also be consistently clarified in the statement of reasons attached to the award. In fact, as confirmed by international practice, decision making according to the principles of equity is a matter of great expertise. The opposite interpretation, namely that decision making according to the principles of equity is a sort of simplified procedure, could border on an abuse of law deviating from principles of due process.

XV. Public Policy as a Factor Limiting Decision Making Following the Principles of Equity 2.41.

2.42.

The scope of powers of arbitrators acting ex aequo et bono is determined, inter alia, by the public policy of applicable law, by the law applicable to the procedure in proceedings and, in the author’s opinion, to some extent by the law in the country in which the arbitral award is enforced. Arbitrators must therefore ensure that the award is enforceable. In essence, this is another limit restricting arbitrators in their decision making according to the principles of equity. With regard to the enforceability of arbitral awards rendered by arbitrators according to the principles of equity, various stances on this issue prevail in different countries. For example, English law has long been very skeptical of equity-based decision making. In the past, authorization to engage in decision making on the basis of equity did not even carry legal effect in England, and foreign arbitral awards made in accordance with the principles of equity (or at a hearing conducted by an the arbitrator as an amiable compositeur) were therefore unenforceable in England. It was not until the adoption of the new Arbitration Act of 1996 that this approach underwent fundamental change. At present, the approach to the recognition and enforcement of foreign arbitral awards rendered according to the principles of equity is quite strict in most countries. Although international practice is not consistent as to whether and to what extent arbitrators should take into account rules in the country of potential enforcement, the author holds that such a consideration is particularly essential when making decisions according to the principles of equity and/or as an amiable compositeur.

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Czech (& Central European) Yearbook of Arbitration

Alexander J. Bělohlávek

XVI. Relationship between Decision Making Following the Principles of Equity and “Lex Mercatoria” 2.43.

2.44.

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A frequently asked question concerns the relationship between decision making according to the principles of equity and the application of lex mercatoria, i.e. the transnational law of international commerce. A sort of prototype can be found in medieval trade laws arising from the habits and principles applicable in business circles, when merchants needed to have certain rules consistently regulating the various aspects of their business. These rules were then initially applied by special “quasi-judicial” bodies from which the courts evolved in the classic sense. This legal system, uniform throughout Europe, was directly applied at marketplaces or in trading cities. This formed a basis for dispute resolution with considerable emphasis on the principle of equity between the parties and the fastest possible meting out of justice. The aim was for traders travelling from town to town to have their disputes resolved before their business commitments forced them back on the road. The purpose of this decision making, which in itself contained many elements of decision making ex aequo et bono, was to make use of an informal process that would lead to savings in both costs and time and result in an outcome which the parties considered fair with respect to their trade practices, rather than a decision strictly according to the existing laws of the country concerned. Despite the many similarities, the concept of decision making under the lex mercatoria and decision making according to the principles of equity cannot be viewed as one and the same. An arbitrator applying lex mercatoria acts as a judge and applies a defined list of rules regardless of their transnational origin and disputes concerning the exact definition of the term lex mercatoria. One of the main principles of decision making according to the principles of equity is that arbitrators are not bound by the obligation to apply any legal rule or principle (they may do so, however, if they believe there is sufficient reason), including the lex mercatoria. On the other hand, it is possible for arbitrators to apply the lex mercatoria in the framework of their authorization to resolve disputes according to the principles of equity. This happens because such authorization obliges the arbitrators to follow this procedure, but solely because the application of the lex mercatoria is in line with the arbitrators’ notion of a fair and reasonable settlement. It might even be claimed that certain lex mercatoria principles and rules evolved from the awards of arbitrators taking decisions according to the principles of equity (whether as amiables compositeurs or ex aequo et bono). |||

Summaries

Czech (& Central European) Yearbook of Arbitration

Application of Law in Arbitration, Ex Aequo et Bono and Amiable Compositeur

DEU

[Rechtsanwendung im Schiedsverfahren, ex aequo et bono und amiable compositeur] Schiedsrichter sind prinzipiell gehalten, gemäß dem anzuwendenden materiellen Recht zu entscheiden. Die Mehrzahl der lex arbitri ermöglicht aber die Entscheidungsfindung gemäß Billigkeitsgrundsätzen (ex aequo et bono) oder erlaubt es den Schiedsrichtern, als amiable compositeur aufzutreten. Dabei ist die Berechtigung zur Entscheidung in Streitsachen ex aequo et bono nicht dasselbe wie die Berechtigung, als amiable compositeur zu handeln. Im französischen Recht, wo der Ursprung der Vorgehensweise als amiable compositeur zu suchen ist, ist letztere so zu verstehen, dass die Schiedsrichter im Einklang mit dem Recht und Rechtsprinzipien vorgehen, aber zugleich berechtigt sind, die Wirkung konkreter Rechtsvorschriften im Einzelfall zu modifizieren. Der Billigkeitsgedanke (equita) ist nur eine Seite der Münze bei dieser Art der Entscheidungsfindung, ein Konzept, welches sich außerdem als Prozess der Rechts- und Gerechtigkeitsfindung zwecks Ermittlung einer gerechten und umsetzbaren Lösung beschreiben ließe. Verglichen mit seiner ursprünglichen Erscheinungsform hat diese Vorgehensweise aber in vielen Rechtsordnungen eine Reihe von Änderungen durchlaufen. Im Gegensatz zur Entscheidung als amiable compositeur, bei der es eher darum geht, den Wirkungen des anzuwendenden Rechts Grenzen zu setzen, sowie um die Art und Weise seiner Anwendung im Rahmen eines gerechten Prozesses, ist die Entscheidung ex aequo et bono im Sinne der internationalen Praxis eine Entscheidung außerhalb des geltenden Rechts, nämlich eine Entscheidung nach Grundsätzen der Moral und Gerechtigkeit. Im Falle der Billigkeitsgrundsätze liegt der Schwerpunkt auf dem subjektiven Gerechtigkeitsverständnis des Schiedsrichters.

CZE

[Aplikace práva v rozhodčím řízení, ex aequo et bono a amiable compositeur] Rozhodci jsou zásadně povinni rozhodovat podle použitelného hmotného práva. Většina lex arbitri však umožňuje rozhodovat podle zásad spravedlnosti (ex aequo et bono) nebo umožňuje rozhodcům postupovat jako amiable compositeur. Oprávnění k rozhodnutí předmětu sporu ex aequo et bono neznamená oprávnění jednat jako amiable compositeur a naopak. Podle francouzského práva, v němž lze spatřovat původ k postupu jako amiable compositeur, jde v tomto případě o postup, kdy rozhodci rozhodují podle práva a právních zásad, jsou však oprávněni modifikovat účinek některých právních předpisů. Spravedlnost (equita)¨je pouze jednou stránkou takového rozhodování. | 49

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Alexander J. Bělohlávek

Tuto koncepci lze popsat rovněž jako proces nalézání práva a spravedlnosti za účelem nalezení spravedlivého a možného řešení. Tento postup však doznal, ve srovnání s jeho původní podobou, řady změn v mnoha právních řádech. Narozdíl od rozhodování jako amiable compositeru, které je spíše postupem omezujícím účinky rozhodného práva a způsobem jeho aplikace v rámci spravedlivého procesu, je rozhodování ex aequo et bono ve smyslu mezinárodní praxe rozhodováním mimo platného práva, tj. rozhodováním podle zásad morálky a spravedlnosti. V případě zásad spravedlnosti je těžištěm subjektivní chápání spravedlnosti rozhodcem. ||| POL

[Stosowanie prawa w postępowaniu arbitrażowym, ex aequo et bono i amiable compositeur] W postępowaniu arbitrażowym należy zasadniczo stosować prawo właściwe, natomiast orzekanie według zasad sprawiedliwości (ex aequo et bono) i występowanie arbitra z pozycji amiable compositeur stanowi wyjątek wymagający jednogłośnego upoważnienia stron. Sędzia arbitrażowy przyjmujący rolę amiable compositeur stosuje prawo materialne, jednakże może ograniczyć niektóre z jego skutków. Rozstrzyganie według zasad sprawiedliwości to rozstrzyganie obok obowiązującego prawa, w oparciu o zasady moralności i sprawiedliwości, a więc w świetle subiektywnego rozumienia owej sprawiedliwości przez arbitra.

FRA

[Application du droit dans la procédure d’arbitrage, ex aequo et bono et amiable compositeur] Il est essentiel d’appliquer le droit d’arbitrage décisif dans la procédure d’arbitrage, alors que le jugement d’arbitrage d’après les principes d’équité (ex aequo et bono) et le travail de l’arbitre en tant qu‘amiable compositeur exigent exceptionnellement l’accord d’un mandat des parties. L’arbitre amiable compositeur applique le droit matériel mais il est habilité à en limiter certains effets. Une décision d’arbitrage d’après les principes d’équité est une décision hors du droit en vigueur du point de vue de la morale et de la justice, c’est-à-dire une décision qui s’appuie sur une interprétation subjective de l’équité par le juge arbitre.

RUS

[Применение права в арбитраже, ex aequo et bono и amiable compositeur] В арбитраже принципиально необходимо применять право, а принятие решения в соответствии с принципами справедливости

(ex aequo et bono), а также действия арбитра как amiable compositeur является исключением, требующим согласия сторон. Арбитр как amiable compositeur применяет материальное право, однако, вправе ограничить некоторые его действия. С учетом принципов морали и справедливости, принятие решения в соответствии с принципами справедливости выходит за рамки действующего права, т.к. оно связано с субъективным пониманием справедливости арбитром. ESP

[Aplicación del derecho en el procedimiento arbitral, ex aequo et bono y amigable componedor] En el procedimiento arbitral resulta primordial decidir conforme a la legislación vigente aplicable, ya que la toma de decisión según los principios de equidad (ex aequo et bono) y la actuación del árbitro como amigable componedor constituyen una excepción que requiere la autorización de las partes. El árbitro, en calidad de amigable componedor, aplicará el derecho sustantivo, sin embargo, es competente para limitar algunos de sus efectos. Consideradas desde la perspectiva de los principios de moral y de justicia o con enfoque en la comprensión subjetiva de la justicia por el árbitro, las decisiones según los principios de equidad son decisiones fuera de la ley.

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