Transcript of the APA Seminar 21 Nov 2011
Giuditta Cordero-Moss
This seminar takes, as a starting point, a book that was published as a result of a research project on the interpretation of contracts, now concluded, that was undertaken at the University of Oslo. The idea there was to find out how contracts are written and to what extent contracts take into
consideration the governing law; to what extent clauses, particularly boilerplate clauses, are formed in accordance with the requirements of the governing law; and, to the extent that contracts are not formed in accordance with the requirements of the governing law, why that is the case. Lawyers do know that governing law has an impact on contracts, so why do they behave in a way that does not take into account the knowledge that they have on the matter? After having discussed international contract practice, the most important part of the book is devoted to finding out what the effects are of having a contact written in a standardised way, independently from the governing law. Does the same wording have the same effects independently from the governing law, or does the governing law actually have an impact on the interpretation and the application of a contract?
Some of the authors of the book are present here today, and some are not. After having found out that the governing law actually does matter and does have an impact on the contracts, even on standardised contract clauses such as the boilerplate clauses, we started wondering – what about arbitration? We all know that arbitration is somewhat on the side lines; it is somehow different. Party autonomy is so much more central in arbitration. So maybe all the wisdom that we have gathered in this book is relevant to court proceedings, but not to arbitration? This is the reason why we decided to have this seminar today, using the wisdom gained on the importance of governing law as a starting point, but putting it into the context of arbitration to see whether it has the same relevance in that context.
So, the day today will be divided into three parts. The first part will consider the framework of the subject matter. The second part will examine expectations when drafting a contract. What kind of expectations do the parties actually have when it comes to the importance of the governing law when they draft a contract? What kind of expectations do the arbitrators assume that the parties had when they were drafting the contract? These things are not necessarily the same. After lunch, the first session will be on the evaluations that the arbitrators make when they interpret the contract. Do
they only interpret the contract, or do they also take into consideration possible effects that the literal interpretation might have on the legal system where, for example, the award should be enforced?
First panel
The idea is that the first panel will set the framework for the discussion. We have two different lines of discussion in the framework. On the one hand is the importance of the governing law. Does the governing law really matter in general, not only within arbitration? What kind of importance does the governing law have for the interpretation of the wording of the contract? The next line of the discussion will be what the sources are; what is the framework for interpreting a contract in arbitration? Do arbitrators have exactly the same framework, do they have to relate to the same formal rules that the courts do – or do they not?
I think we can introduce both lines of discussion to start with, and then we can have the discussion first within the panel, and afterwards everyone is welcome to participate, not necessarily exhausting the first subject before starting on the next.
I would like to first give the floor to Professor Graziadei when it comes to the question of the governing law, and afterwards, to Professor Pocar, when it comes to the question of the framework for arbitration.
Michele Graziadei
Now we see the product of the previous line of research (the book). In many ways, the subject that you have assigned to us, that is to say, what the impact is of the governing law on the interpretation of a contract, has something more to be added to it in terms of the wording itself. In many ways, this topic is already illustrated in your book because, of course, the discussion of the clauses that are presented in your book as typical boilerplate clauses is carried out in the light of several laws, and not all the laws react in the same way to those clauses that are drawn from the Anglo-American
experience. So, this is a graphical illustration of how the governing law can make a difference, and how one should be careful when assuming that the same words mean the same things under the different governing laws. So, my function is basically to expand a little bit on this point because, of course, your research was focused on the specific topic of how certain clauses will be addressed by the governing law.
So what are the broader reflections on this subject? First of all, we know that when foreign law is chosen, that choice of foreign law will also govern the interpretation of the contract. But, a point to bear in mind is that what relates to the interpretations under the different legal systems that may come into play is not necessarily exactly the same thing. That is to say, the very idea of interpretation
is not uniform under the different laws. To be a little bit more specific, certain subjects that, say, in France or Italy, would be covered by the notion of the interpretation of a contract, will in English law probably belong to a different department. The content of the contract, for example, because implications of terms will probably be considered under that type of label. So, the first point to keep in mind is probably that what counts as interpretation may be different in the different legal systems.
The second thing is that we speak of the choice of the foreign law, but the exact nature of rules of interpretation is somewhat controversial in the different legal systems. There are legal systems that take for granted that the rules on interpretation of contracts are actually law, and there are legal systems where you would find that these rules are considered to be sort of suggestions or guidelines, more or less to the person that has to apply the contract.
Now, this may be interesting, because it will be taken into account as to whether the court of last resort in that jurisdiction will be able to review what a trial court or an appeal court has done. If the rules in questions are considered to be sort of logical rules, but not really legal rules, then the court of last resort will be very reluctant to interfere with what has been done at the trial level. And this is the case in France, because in France, the court of last resort, the Cour de Cassation, will probably only interfere with the interpretation given by the judge on the contract in extreme cases; that is to say, only if there is a sort of excess of power; that is to say, only if the trial judge really abandons any reasonable interpretation of the clause, turning the contract into something else. Only on that point will the supreme court quash the trial court’s interpretation of the contract. In Italy, in Germany, it is assumed that these rules are legal rules, and you can get a review of what the court did at the first level, or at the appeal level if these rules have not been followed. So, the nature of these legal rules, as considered by the lawyers belonging to that legal system, will have an impact on what type of decisions you can get on the application of those rules.
The third general observation is that we usually discuss this matter – that is to say, the interpretation of the contract in the light of the governing law – by looking at what rules of interpretation each legal system adopts. For example, by opening up the French code or the Italian code (the German code is more prudent on this point), you will read certain rules related to the interpretation of contracts.
But, in my view, it is far from clear that these rules are the very important rules that actually control the entire process. There is a preliminary point that we have to keep in mind and, of course, it is not spelled out in the code, because the code is written for national lawyers; it is not written for the foreign lawyer who has to apply the code as foreign law. So, there is a point that probably is not captured if we just look at the codal provision, and that is the following. There is the basic distinction that you outline in the book, and you cover in the book, between contract drafting in a way that is considered to be complete and self-sufficient, and contract drafting of a different style. This
difference also relates to the difference between systems of law that have a code and, therefore, have norms that will apply unless they are derogated by the parties, and systems of law that do not have such provisions. Namely, in most cases, common law systems lack this type of provision, unless you are dealing with a specific topic such as sales, for example.
Now, what does this difference mean? If we look at the interpretation phase of the contract, quite often the crucial step is how you characterise the contract. Is it a sale, is it an agency contract or is it a loan? Once you have characterised the contract, you will have provisions that will apply, unless they are derogated by the parties. So, this step, which, strictly speaking, does not belong to contract interpretation, is a slightly different technique, because there is the intention of the parties, but, of course, the parties may have chosen the wrong wording in some sense. Once you make this crucial step, you will have consequences in terms of legal effects and the outcome of the interpretation process because you assume that the contracts belong to a certain specific set of rules, and then you will proceed by reading the contract in the light of that. If you are dealing with a system of law that is free from this type of input – that is to say a code of provisions relating to a certain named contract – then of course you have an attitude, which is, by necessity, different, because you may have terms that have to be implied in the contract. But, the technique is much more flexible than the technique that we are accustomed to using when we are dealing with a contract under a code.
I am leaving aside a number of considerations, such as, are there places where the contract is interpreted more objectively or are there places where the subjective will of the parties is more important? This is because it is extremely difficult to come to precise conclusions on these points.
Partly because contract theory has evolved in the same direction almost everywhere, so that when you open a book on contracts, you will find more or less the same basic assumptions everywhere. If you leave this high theory level, and you turn to actual practice, as you suggested by publishing this book, there are several differences concerning contract interpretation, but probably the most important factor does not relate to the governing law, but rather to the jurisdiction where you land with your case, because it is true that the qualifications of the judge that will eventually handle that contract are probably the most important of factors.
This brings me on to the next subject. That is say, why you would turn to arbitration rather than litigating your contract in a court. Probably because you are able to choose the arbitrators, while you are not really able to choose the judge in the sense that, yes, you can have a jurisdictional clause naming the tribunal of Milan, but at that point, you are not quite sure who will be the person sitting in the tribunal of Milan on that day. It makes a huge difference whether it is judge A or B. Now this is not about being terribly sceptical about the rules of interpretation, but is simply said to point out that the interpretation of a contract is an activity that you carry out not for the mere intellectual
pleasure of understanding what the intent of the parties is, but to solve cases/questions that have been posed by the application of the contract, by the enforcement of the contract. And at this point it is clear that the institutional setting that will be rendered will have an influence. Let me just give an example taken from the Italian practice. This was a court of cassation case in which the court of cassation had to decide what the phrase/sentence “within three months of termination to give notice” meant. Now, I will not focus on the solution of the case, but what struck me when reading this case was the fact that the court of cassation mentioned a precedent of a court of appeal in England, as if in England there weren’t several courts of appeal, and there was just one decision by a court of appeal in England. Of course, if you have this type of attitude, no matter how much counsel presses precedence on the court about the interpretation of a contract, something will probably be lost for those judges. So, this is a factor that I will stress; that is to say, why contracts are interpreted in a more objective way. That may not be a question of legal philosophy, but rather a question of what type of litigation a certain court handles. If you are in London, over 50 per cent of the cases decided in London have an international element. This is surely not true for, say, courts in other countries that are irregularly engaged in the exercise of interpreting a business or commercial contract – in most cases, they have to deal with completely different types of disputes. So, the mentality would probably be very different. So, I will stop here in the first round.
Fausto Pocar
For the purposes of this debate, I will try to start from the same point of departure that has been taken by Graziadei. That is that the interpretation of the contract in principle depends on the governing law. So, this is a rule that has been explicitly expressed by the majority of lawyers, both in continental law systems and in common law systems. I don’t have to expand on that, because this is quite clear. Books such as Dicey, Morris and Collins are very explicit in the sense that any clause in a contract has to be interpreted according to the governing law. And also in manuals concerning arbitration, the interpretation is normally the first item that comes under the governing law. It is always mentioned as a source, so it is also in the EU regulation on contract obligations. So, this is a starting point that is clear, but, on the other hand, a contract has a contractual regulation. When the parties enter into a contract, they adopt their rules, and, in a way, they decide that their contractual regulation is governed by the contract. Now, the aim in such a situation when you, on the one hand, have the governing law, and on the other hand, have the contractual regulation, should be to have these two regulations as compatible as possible. And one should go about settling the action. The situation may be different in a court of law and in arbitration, definitely because the court of law will not have to necessarily follow the instructions given by the parties. It mainly bases its assumptions and its conclusion on the law, simply. An arbitration tribunal has to follow the instructions given by
the parties. It is one of the main obligations of an arbitral tribunal, but at the same time, arbitrators have also to necessarily take into account the governing law. So most of the questions may depend in some cases on how the governing law is assessed, because one may have incompatibility between the contractual regulation and the governing law. But the first step is to decide what the governing law is, and then on how much the governing law may depend on the contractual obligation itself.
Now, we may have different situations, of course. The first and most simple, in a way, but even more complicated, is when the parties expressly choose the applicable law in the contract. It is the simple choice, because both the court of law and the arbitral tribunal will have to stick to that choice. If the choice is clear, if the choice is not questionable in terms of the applicable law, it is clear that the law is applicable, and that the law is the governing law. And inevitably, if the contractual regulation is not in conformity with the governing law, we have a problem, and have to decide how to deal with that problem. That involves whether to give precedence to the governing law or to what extent one can go to the contractual regulation. Again, there is a difference, even, in this case, depending on how the choice of law is made. Parties may choose the state law, and that will probably be the only choice recognised by the court of law. I make an abstraction from contracts based on international law – I am sticking to commercial contracts here, because of course this may be different when you have a contract with an individual company and a state that rely on international law. But that is a different topic; I will not be dealing with that here.
In arbitration, an arbitral tribunal will give effect more easily to a choice that leads to a non-state body of law. A court of law might accept that or not depending on the legislation, but the main trend is essentially to accept a state law, and make reference to a non-state body of law, as long as it is subordinate, in a way, to a state law. As long as the state law meets with party autonomy. But this is not the main difficulty. One of the main issues that may arise is when the choice of the applicable law made by the parties is not expressed clearly, but can be inferred from the contract. This is normally accepted. It is a tacit choice of law. I don’t have to expand on the rules. It is enough to mention the recent EU regulation on the law applicable to contracts, the Rome I Regulation, where it is said that the choice of the governing law may, and must be clearly demonstrated by the terms of the contract or the circumstances of the case. But, let us remain on the terms of contracts, because the terms of the contract are precisely the contractual regulation. Here I see a slight problem when you come to the construction of the contract, because when a court or an arbitral tribunal has to assess whether the choice is demonstrated by the terms of a contract, it will have to interpret the contract with the view of establishing the parties’ intention as to the applicable law. It is difficult to say, to infer from the terms of the contract, the choice, if you don’t interpret the contract. This is an issue that may not arise in practice, although in theory it could when it is an express choice of law, because the choice is
clear, there is no need to refer to the principle of in claris not fit interpretatio but still it is easy to come to the conclusion that that is the law that was chosen. But when an arbitral tribunal has to infer the applicable law from the clauses of the contract or the terms of the contract, there may be a problem, because we have two subsequent interpretations. On the one hand, one has to interpret the contract for the purposes of inferring the applicable law, and once the governing law has been determined, one has again to interpret the clauses on the basis of the governing law, which may come to a different canon of interpretation, in a way. The court of law especially might apply the lex fori for the first interpretation, and then we have inevitably to apply lex causae for the second interpretation. Would it be the same for an arbitral tribunal? Well, I may consider that an arbitral tribunal may have more room to try to avoid having an interpretation based on two different canons of interpretation, and might try, in many cases, to accord the two interpretations of the terms of the contracts. Especially because an arbitral tribunal will not be bound by a lex fori in construing the contract the first time. That may raise a number of problems, which I will not try to solve here.
Would that mean that if we give the same interpretation that the clause (which is regarded as a merely stylistic clause, such as the frequently used boilerplate clause, not always, but frequently), which is stylistic for the purpose of demonstrating the applicable law, should remain stylistic and have no impact when the contract has to be interpreted according to the governing law? It is not obvious in all cases. Take the case in which good faith would come into place for the purposes of the choice of law demonstration; the governing law will not recognise the good faith aspect when interpreting the contract. The problem will also remain a problem that is difficult to resolve in this case. But, as an arbitral tribunal has more of a possibility of relying on principles outside the
governing law than a court, in regard to transnational principles in particular, it would more easily try to take this aspect into account in its interpretation.
Then we have the situation in which no choice of law, whether expressive or tacit, is made by the parties in the contract. From the contract, no choice of law can be inferred in any regard. Now, it is clear that the applicable law in this case has to be decided – determined, on the basis of conflict-of- law rules. But again, these rules may be different for a court of law and an arbitral tribunal. The terms of the contract would play no role in terms of this aspect when a court of law is seized. Except, of course, for those terms of the contract that represent a connecting factor with the applicable law, when is it clear that the conflict-of-law rules should be applied. But I am referring to the rules on the construction of the interpretation of the contract. So, they would play no role. However, the
situation might be slightly different in arbitration where the tribunal is not obliged in principle to apply a specific conflict-of-law rule. Frequently, the practice shows that reference is made to the conflict-of-law rules of the place of arbitration, but this is not the only solution that is possible.
Reference can be made to the conflict rules that the tribunal considers more appropriate, or to rules that are specifically designed for arbitration. Or, even though this is more questionable, a tribunal may make a direct application of a substantive law without referring to a conflict-of-law rule. I say it is a bit questionable, because, in any event, even if an arbitral tribunal does not refer to a conflict-of- law rule tacitly, implicitly it will make a choice of law in any event – maybe not based on the
traditional connecting factors, but even on deciding that the substantive law is the one that should followed in the case means making a choice in favour of that substantive law. But this is accepted by arbitral institutions in many situations.
Now, it remains to be seen how far the terms of the contract, although they may not be sufficient to point to a specific law demonstrated by tacit choice, may play a role in determining the decision of an arbitral tribunal to apply conflict rule A or conflict rule B as the most appropriate in the given case. I submit that the latitude that an arbitral tribunal has to decide on the applicable conflict-of-law rule, may allow it to take into account the terms of the contract, and perhaps lead to a rule which will eventually go to an application of a law which is not necessarily in conflict with the clauses. But, of course, there are situations in which the conflict will inevitably arise. In the book, the situations are well explained, and I will not go into the solution for this situation, but, of course, in any event, this solution will depend, to a large extent, on the governing law. It is quite difficult to imagine that in a given situation the terms of the contract will prevail entirely over the governing law. Of course, the governing law will normally give some space to party autonomy, and as long as that happens, there is no problem. The contractual regulation will be applicable, and this will be, in many cases, what happens. But there are situations in which there is a conflict. This is a big issue because these clauses are normally inserted in a contract without thinking of what their role may be. So, if we take that into account, is there really an intention of the parties to rely on these clauses? When, at the same time, the parties under a contract frequently have a firm and clear rule of the applicable law, do they really want to have a separate regulation from the governing law? Or, are these just clauses that under the Italian law, would be considered stylistic and not play any role at all in the contract? In other
jurisdictions, it may be different, but nevertheless, if there is no clear intention of the parties relying on clauses that are sometimes just repeated in all contracts, irrespective of the field in which the contract is drafted, sometimes it is not even fully obvious in a certain domain. So if this is the case, should not, in any event, the governing law prevail and the canon of the interpretation of the governing law be applicable? I leave the question open and stop here for the moment.
Aapo Sarikivi
I was thinking about being a practicing lawyer, bringing a practical aspect into the discussion, but since Pocar so aptly introduced aspects of the qualifying process in the context of the choice of law, I
thought I would add a more theoretical note into the discussion, in the sense that one aspect which often materialises in arbitrations is the question of how to interpret the choice of the laws
themselves. And choices of law, I submit, are in fact very much boilerplates themselves, in the sense that to a very large extent, choice of law clauses in themselves are very standard – usually what you hear is that this agreement should be governed, possibly construed, in accordance with the law of X country. The only variable will actually be the country in which the law is to be applied. But, what this of course leads to is the question as to whether the wording of a choice of law clause should be given any independent effect in, let’s say, interpreting its scope. Should it be strictly limited to contractual issues or should it be interpreted as encompassing, for example, the entire commercial relationship relating to the contract? Or, what is the role of the parties’ expectations?
If you look at arbitral case law, for example, arbitral tribunals will often take a practical or holistic approach, I submit, in trying to gather a commercial relationship as a whole under one law, under a scope of a boilerplate choice of law clause. Whereas at least on the basis of the analysis of the national courts, I suggest that national courts may not be equally inclined to do so.
Jerney Sekolec
I would like to first explore with you the history of the word boilerplate. A boiler is a cylindrical thing, big or small, and they are produced in such a way that two sorts of half-moons are welded together.
And that is where the term boilerplate actually comes from. The Americans, who are eminently practical people, the big publishing companies, when they came up with very interesting articles, they were selling those articles to the local newspapers all over the country. And, you know, in the old days, when there was no email and so forth, they had to do it with boilerplates. Mainly with the printing presses, where rotary cylinders, and the people who were composing the articles would actually compose them on big machines, and then they would put them into forms of half-cylinders, which would then be put together into a full cylinder, and then they would be the rotary printing machines. So, the New York Times would then, at the end of the day, produce several boilerplates, actually half plates, with articles that were of general interest, and would just sell them all over the country. They would be printed two weeks afterwards, three weeks afterwards, four weeks
afterwards, depending on the … That is the real history of boilerplates.
And people were investigating the effect of the same article, the very same article, on the same boilerplate in New York printed on day one, and the news printed several days later, or three weeks later in different parts of the country. And they found that the news had different content, had a different meaning depending on the contexts in which it was presented. And the context is time, and what people know at that moment and so forth. And I think the same thing happens with the
wording of a contract. Some of it may be individually negotiated, and some of it may be standard – just by a copy-paste technique. And, I think we have heard enough now to agree that a contract or a contract clause, which is in dispute, has to be understood in its context. And the context means something beyond those words that we are interpreting. And the question is what is that context?
And I think that is really the question we are discussing. And the speakers up to now have been saying that the applicable law is perhaps the most important context – no contract is out there in a vacuum. It must be embedded in what we call the applicable law. There may be other things than the applicable law to complicate matters, but the applicable law is the first step. I think it is hard to deny that.
I will make a small digression now. We have heard a very interesting discussion by Judge Pocar about is this context interpreted differently, or is the contract in the context of the applicable law
interpreted differently when we are in front of a judge, as opposed to when we are in front of an arbitrator? And he said yes, there are differences; people perceive that there are differences. But the question is how far should those differences go? And here we have to go to the origin of what the parties expect and of what the parties want. I think the parties, when they enter into a contract, what they basically do is distribute risks between them. They say this is your responsibility, this is my responsibility, and if something unpredictable happens, this will be your risk and something else will be my risk. And the price depends on how they distribute that risk. It is very concrete. So the parties have a fundamental interest in the clarity of the contract. They abhor contracts where you don’t know who is bearing the risk of something that might happen. Whether that which happens has been foreseen in a contract, or that which happens is a catastrophe that the parties have not foreseen.
And that is important for many things: For the price between the parties, when they insure something, in some aspects of the contract, the insurance premium will depend on that. In some more sophisticated trading, when the contract or some of the contract obligations or the whole contract are assigned to a new party, the new party will accept the assignment of a contract if it has reasonable certainty in knowing what the risks are. So, I think it is the duty of everybody, the
government, the courts, the arbitrators to bear in mind this instinctive desire of the parties not to be cheated, not to be surprised at the end of the day by some legal theory. You know that the
distribution of risks is such that they did not expect that theory to interfere with the contract. Such instances, which inevitably exist in life, result in an obstacle to trade. Trade will be much easier, or should I say, the ease of trade depends on whether the parties’ expectations as to what their risks are, are upheld in the ultimate court proceedings or arbitration proceedings. And, it was said that in court the applicable law is more rigid and in arbitration it is freer. But Judge Pocar said the freedom arises from the fact that the concept of lex fori in arbitration is a bit more nebulous. And, in
particular, the arbitrators will not necessarily choose the conflict rules of what some might regard as the lex fori. They would choose the conflict rule that they regard as being appropriate in the case. So, there is a bit of unpredictability there. But, beyond that, it seems to me that the arbitrators should not take more freedom when interpreting the contract. Once they have determined the applicable law on the basis of the conflict rules, they are not free to take further liberties with the applicable law. Some arbitrators would say, well, if we adopt a certain rule of interpretation, which is a bit more liberal and independent of the applicable law, nobody but the good Lord can control us, because there is no review of the substance of the arbitral award. I think that reasoning is very dangerous.
The fact that nobody controls you does not give you the freedom to not respect the rules. That, I think, is almost a question of ethics. But there is a bit of uncertainty there, and people like Statoil, who have thousands of contracts, hope to God that their expectations in that contract will be upheld by the arbitrators and the judges, as it is their nightmare if it is not so.
When we look for that context where the applicable law is an element of it, there are further uncertainties. We heard Graziadei say that some regard the rule of interpretation of the applicable law as a part of the law, and others regard it as guidelines, as a method of thinking. And that is a further uncertainty, which one has to be aware of.
I think that there is yet a further element of uncertainty, which the parties, when they draft their contract, should bear in mind. Namely, there are perhaps civilised nations or cultures that look differently at the piece of paper on which the contract is written. Some attempt to look at the literal meaning of the contract, and they will read it within the four corners of the contract. And others would say that that contract of one page or 100 pages is part of a much larger social relationship, which has a history, which has interests behind it, which has a future. And regarding those approaches, one is very formalistic and one is much more contextual. A law does not give us an answer; you know which is which. It is the sociology that gives us the answer, and I am told that one reads in books that, for example, an American lawyer or an American party would tend to read the contract more literally than their Japanese counterpart. The Japanese party says sure we wrote this, but you know our interest, our history, our hopes for the future are also part of the contract, and all this has to be taken into account. I think these are clichés, you know; I don’t think that there is an American way of thinking and a Japanese way of thinking. Maybe it was 300 years ago when we were really brought up in a very close society. Now there is television, young people study here and there, do an LLM in New York, and then a law degree in Oslo, and then they go to Moscow. So, it is hard to say that they will follow one legal tradition. I would say that this tendency to read the contract strictly, to take the literal meaning of the contract as opposed to the contextual reading, is more a gut reaction of an individual person. An attorney, a contract party, an arbitrator or a judge. As long as
there are different people, there will be different mixtures of the two approaches to reading the contract. And that is a further uncertainty. And I think that if there is anything that the parties or the attorneys should take from this, it is that it is very dangerous and difficult to write a contract,
because you don’t know how somebody will understand it, the other side, and you do not know how the arbitrators will interpret it, and you don’t know how the judge will interpret it. So you have to make very sure that you express yourselves clearly. That is, contract drafting is expensive because you have to have an expert do it; you have to have excellent lawyers do it. Like anything in life, it is a question of investment and benefits. Sometimes it is good enough if you don’t have a lawyer, because you trust the party and it is just not worth the trouble. Sometimes when the stakes are very high, it is worth the trouble to negotiate the contract very carefully. You know the more the contract circulates in the world, the more these uncertainty factors come to be. I am always amazed when … the text of the Bible is close to 2000 years old, the New Testament, and people try to read it. Some will try to give it a literal meaning, and will guide their own personal life and their moral standards by a literal meaning of the Bible. And they believe in it, and others will instinctively read it in a more, yes it does say so in the Bible, but that was written 2000 years ago, and we don’t know exactly what they meant by that and now I will adopt it to my own world. I think the reactions of the people to the Bible are different because their instincts are different, and I think it is in some sense similar with a contract. It is much closer in time, so there is less of an uncertainty, but still, I think that we have to count on these different instincts of people.
Gustav Möller
Firstly, in my jurisdiction, it is absolutely clear that interpretation is something that is a matter of the governing law. It is quite obvious that this is a question of law. One of the points that Pocar raised that concerned me a bit is Rome Art 3. Well, if the choice has been made expressly, or if it is clearly demonstrated by the terms of the contract, there is no problem. And here I think the state court would decide, whether it is demonstrated by the terms of the contract or not, or by the
circumstances of the case, to have this interpretation in many countries by applying the lex fori. But in arbitration, I do not think it should be done in the same way, because as Sekolec quite rightly said, in an international arbitration, you don’t have a lex fori in the same way as in the state courts. And moreover, I think it has been common ground for a very long time that an international arbitral tribunal is not bound by the choice of law rules of the seat of arbitration. Already in 1961, in the Geneva Convention, it was said that the arbitrators should apply the choice of law rules that they deemed applicable, which is a clear indication that arbitrators nowadays have more discretion in this respect than a state court. A more modern approach is that you do not mention any choice of law rules at all; you just directly decide which law is applicable. In other words, the arbitrators decide
what is the applicable law without any conflict-of-law analysis. As far as I have seen, it is my experience as an arbitrator and as a member of the ICC court; in most cases, the parties seem to choose the applicable law in their contract. It is not that common that they just leave it wide open.
And then the choice is very often explicit, being the choice, for example, of the law of Delaware or the law of Russia. Thus, it is very often mentioned that a national law shall apply. And here, I was a bit astonished. I don’t know whether I understood Pocar correctly when he said, well, courts will try to construe these choices, these explicit choices of law clauses narrowly, more narrowly than arbitral tribunals. I am not disputing that it may be the case, but I think at least in my country, having been a Finnish judge for a long time, I would never think that we would apply some sort of dépecage there, and just construe it to be a part of a party relationship and not to the whole legal relationship.
Of course, I quite agree that when, in a case where there is no choice of law, in a state court you apply the national law designated by the choice of law rules of the lex fori. But I think the arbitrators have a greater freedom there. They can apply, for example, the UNIDROIT principles or similar non- national rules. Then, of course, when arbitrators interpret those rules, they have more freedom than state courts. But on one point in particular I agree with Sekolec when he says that, well, if there is a choice of law, the arbitrators should be as bound as a state court. And I think that is something that I agree with in principle, because if the parties have agreed on the applicable law, there is an
agreement, and I can very well imagine that a company wants some sort of predictability. And when it is clearly said, for example, that Norwegian law should apply, it should apply, and it should apply in the same way as the Norwegian Supreme Court applies it. I don’t think that there should be any doubt in this respect. I have never experienced it in an arbitration, and very few times have I seen a court that says that an arbitrator can just decide ex bono or just according to general principles or lex mercatoria. I think it is quite rare to see those clauses.
But, as a conclusion, I can say today there are some differences between a court and an arbitral tribunal, for instance, when deciding whether a choice of law can be inferred and also with the freedom to apply other principles if there is no explicit agreement. I think there are more things to be said, but I think we can continue our discussion and I can come back to this later.
Giuditta Cordero-Moss
I am under the impression that the question as to what you interpret as a possible dépecage was one of the points that Sarikivi had mentioned concerning whether the arbitrators are more lenient in applying the choice to the whole relationship, rather to only the contractual aspects.
Gustaf Möller
I understood from him that law courts try to construe the choice of law clauses narrowly. I am not sure whether this is the case. I was a judge for more than twenty years and I never saw anything that would support this view. That is, I don’t think Finnish courts would do it. However, I believe that national courts may possibly think, well, because we don’t know the foreign law and, therefore, there may be mistakes, we would rather apply domestic law. But I don’t see the difference in principle between courts and arbitral tribunals, at least not in my country.
Aapo Sarikivi
If I may follow up on that. I fully agree with Möller on the approach that Finnish courts would take on the matter, but then if I refer to what I previously said, the analysis was based on primarily US, German and French case law. Actually, I am not aware of a Finnish case where this would have materialised. But I am aware of arbitration cases where this has happened. They certainly have taken a holistic approach.
Ivan Zykin
I agree with much that has already been said and will try to avoid repetition. In my view, the topic
“The interpretation of contracts in international arbitration: applicable rules” is very aptly chosen to begin the seminar. The issues of interpretation are of great practical importance. Sometimes establishing the meaning of several words decides the very outcome of a multi-million case. I will give some further examples. Even if a case focuses on establishing the meaning of just a couple of words, the task before arbitrators is not simple. It might be rather difficult to ascertain the meaning of a contract term due to different approaches having been used.
Some scholars advocate a more liberal approach. That is, to rely upon the concept of lex mercatoria and the like. Although these concepts are often widely advocated, they are not applied in practice as often as that. My personal experience shows that arbitrators, for the sake of predictability, tend to rely upon the rules of the applicable law when interpreting contracts. Therefore, I have much sympathy with what has been said by Mr Gustav Möller.
The issue, which is often discussed at different conferences, is whether arbitrators are in the hands of the parties, or vice versa. The parties agree upon a contract, an arbitration clause and, in many instances, upon the applicable law. If no law is chosen by the parties, they often ask arbitrators to decide upon the law that is applicable as a preliminary issue, especially if the case is complex.
It was already quite correctly stated that arbitrators are ordinarily not strictly bound by particular conflict-of-law rules. Besides, the said rules themselves are very flexible in the contractual sphere. It
turns out consequently that in a number of cases, it is hard to foresee with sufficient certainty what law will be determined by arbitrators in the absence of a choice of law by the parties. Since options might be different, the parties normally tend to refrain from arguing their case, relying on several national laws eventually being applicable. Otherwise, their task becomes much more complicated, time consuming and costly. The above holds true to practically all substantive issues, including the issue of the interpretation of a contract.
According to my experience, when the issue of contract interpretation arises, the parties and their counsel try to argue these issues within the framework of the particular legal order. They rely upon the rules of interpretation, for example, of English law, Russian law, Swedish law, often referring to judicial practice.
Depending upon the case, the parties invite expert witnesses, witnesses of fact. The latter category of witnesses might be of primary importance if there is a need to establish a real common intent of the parties. Lawyers representing the parties during arbitration proceedings might have considerable difficulties in proving before the tribunal what was a real common intent of the parties when drafting the contract, if none of these lawyers were present during the negotiations. If one of the parties produces a witness of fact to testify how the negotiations went, most likely, the opposite party has no better choice other than to present its own witness of fact to prove its case.
One of the theses constituting the framework of the discussion is formulated in the following way:
the wording of the contract may have different legal effects depending on the governing law. Let me briefly illustrate this thesis. UNIDROIT Principles of International Commercial Contracts provide for two basic principles of the interpretation of a contract. Firstly, preference should be given to the common intention of the parties. Secondly, where such common intention cannot be established, then recourse to the understanding of reasonable persons should take place (see Art. 4.1 and Art. 4.2 of UNIDROIT Principles 2010). A similar approach is found in Art. 8 of the 1980 United Nations (Vienna) Convention on Contracts for the International Sale of Goods (CISG). The Civil Code of the Russian Federation (RCC) also has provisions on the interpretation of a contract. According to the RCC, firstly, a literal meaning of a contract term should be taken into account. If the meaning of the contract term could not be thus established, then the real common will of the parties must be ascertained (Art. 431)
The formal differences between UNIDROIT Principles and the CISG, on one side, and the RCC, on the other side, are quite evident in this regard. From a practical point of view, these differences should not be, however, overestimated. It is very often quite burdensome to prove a common intention of the parties. The literal meaning of a contract might also not be clear, bearing in mind, in particular, the international nature of a case where parties are from different countries, arbitrators are from
different countries etc. In our view, the reference in the first part of Art. 431 of the RCC regarding taking into account “the other terms and the sense of the contract as a whole” actually allows for the possibility of having recourse to the understanding of reasonable persons, though without saying it expressly.
Further, I would like to give some examples. One of the examples is a big case between a French company and a company from Cyprus, decided under the UNCITRAL Arbitration Rules in 2006. The core issue was whether one of the parties had complied with a contractual obligation to use its “best efforts” to ensure the fulfilment of the conditions precedent to closing of the deal. The parties agreed to English substantive law as the applicable law, in particular, for the interpretation of the contract. Both of them introduced several statements of witnesses of fact and presented testimonies of legal experts.
The tribunal followed the will of the parties and determined the legal test for “best efforts” in accordance with English law. The tribunal came to the conclusion that the contractual phrase “best efforts” had required the party to take all steps that a prudent, determined and reasonable company would take acting in its own interests and desiring to achieve that result.
Another example concerns a big dispute between a Canadian company and a Dutch company decided under the SCC Arbitration Rules also in 2006. The central problem was the issue of pre- emptive rights. The contract contained a wording to the effect that if the control of an ultimate parent company were to be changed, the pre-emptive right was triggered. The parties clearly took into account the situation that existed when they entered the contract. Afterwards, some changes occurred. The parties disagreed as to whether the pre-emptive right was triggered under the changed circumstances.
There was a provision in the contract that the pre-emptive right arises under the described circumstances and in case of any “similar change”. Hence, it was necessary to determine the meaning of the words “similar change”.
Kazakhstani law was chosen as the applicable law by the parties and they relied upon that law when arguing over the interpretation issue. Like in the former case, testimonies of witnesses of fact and opinions of legal experts were presented by both parties.
In line with the parties’ common will, the tribunal applied Kazakhstani law with regard to the issue in question. It is worth noting that Art. 392 of the Kazakhstani Civil Code (KCC) on the interpretation of contracts is identical to Art. 431 of the RCC quoted above. Accordingly, the first step was to determine whether the use of the literal meaning of the contract term could be taken into account.
The tribunal concluded that an expression like “similar change” did not have any fixed meaning in a
literal sense. Therefore, having recourse to a literal interpretation did allow the tribunal to determine the proper meaning of the words used. For this reason, the tribunal applied supplementary interpretation rules provided in Art. 392 of the KCC, which relate to the assumed common intention of the parties assessed primarily on the basis of the purpose of contractual provisions.
To sum up, my conclusion is that arbitrators tend to rely upon applicable law when interpreting a contract. They also try to take into account the international nature of the case and avoid being over- formalistic. According to my experience, recourse to the understanding of reasonable persons is mostly met in practice.
One more observation to make is in line with what has been said by Professor Michele Graziadei. We share the view that there are grounds to distinguish between the two steps. First, there is a need to ascertain the meaning of contract terms. This phase may be regarded as a contract interpretation in a strict sense. The second phase is to determine what legal effect should be attributed to such contract terms. This task goes beyond the mere contract interpretation. The problem is to determine how the given term should be characterised or qualified in the light of the legal concepts of the governing law. The rules of interpretation (e.g., chapter 4 of UNIDROIT Principles, Art. 8 of the CISG, Art. 431 of the RCC) do not give sufficient guidance in this respect. They have a limited purpose to help to ascertain the meaning of the contract terms used. The established meaning might serve as a basis for a further legal characterisation of the contract or particular terms used therein. However, such legal characterisation is made under legal rules other than those relating to the interpretation of a contract in a strict sense. These two distinct, though interrelated, tasks are accomplished on the basis of different sets of rules of the governing law.
Thank you for your attention.
Fausto Pocar
Only a small point on predictability. It is true that arbitrators have more freedom in determining the applicable law, and this may result in uncertainty as to the regulation. But I submit that it would be for arbitrators to use that freedom in order to ensure predictability as much as possible. So, and when I said that, they may, in assessing which is the applicable law, the most appropriate applicable law, take into account more than a court of law, perhaps the contractual regulation as coming out of the terms of the contract. That should be used in order to ensure predictability, in order to ensure that the applicable law will conform as much as possible to the contractual regulation made by the parties. That, I think, should be an obligation, a duty of a panel of arbitrators. And of course, it has also been said, and I agree that once the choice has been made by the arbitrators, and the applicable law has been determined, that should be notified to the parties in order that they can plead
according to the law. The parties should never be taken by surprise in arbitration. They may sometimes, in the court of law, be taken by surprise, and in the end receive a judgment which they did not plead for exactly, because they did not think of the law, but the judges thought of the law of it, and the parties will come out with a decision where they have not been informed in advance on the law that would be applicable. But in arbitration, that should be a rule, actually.
Catherine Kessedjan
My first remark is should we make a difference exist between the three kinds of arbitration that I have in mind, and Pocar eliminated, very rapidly, international law. I am not entirely sure at this time regarding the practice of international business as to whether we should eliminate that
automatically. I see three kinds of arbitration. The first one is the traditional commercial arbitration with two or more parties, but very basic commercial transactions. The second one is in investment law, where we have treaty claims and contract claims coming to an arbitral tribunal at the same time.
And so we see in the practice of investment arbitration, where you have a contract claim that is kind of either subsidiary or principal. But then the treaty claim comes in, and it has an impact on the applicable law and on the way the contract is interpreted. So, I am wondering whether you also have that in mind? And then there is a third kind of arbitration, which we see nowadays quite a lot in the US; it has not yet come to Europe, but I am expecting the first cases to arrive. It is class arbitration.
And then you not only have a boilerplate clause, but you have a boilerplate contract, a kind of OTC, over-the-counter contract. Then it is yet another type of issue that I think we should think of.
My second remark is quite ironic because we are talking about interpretation. Interpretation is language. We are almost all in this room speaking a different language than our mother tongue. And I can tell you that the three languages in which I arbitrate – French, English and Spanish – I think differently in those three languages. So, I am tripolar when it comes to arbitration, and I think we should take that into consideration. The language in which the case is argued and the language the contract has been written in. Nowadays we are very often confronted with contracts that have been drawn up in English by non-English writers, and in the last examples that were given, we don’t know the language of the contracts, but I fear or I feel that they were in English.
My third remark is about whether or not arbitrators use conflict-of-law rules. And I am telling you that in my practice, which of course has no value statistically, it never happens. We always go either the parties have expressly embedded the law in the contract, and I will come back to that in a minute, or they have been silent. I think it is almost, if I remember the statistics of the ICC well enough, 15 per cent of contracts are silent when it comes to the applicable law, which is an
enormous number of contracts, I think. And then the arbitrators here go directly to the proper law.
They don’t really go through a conflict-of-law analysis. At least that is my practice.
Then, my last remark, relates to apropos non-state law. I am always very puzzled, and I am still looking at ICC practice on this point. But I am always very puzzled at how arbitrators are allowing themselves to import UNIDROT principles or non-state law in contracts where the parties have expressly chosen a national law, a domestic law. I have seen those cases; they are not the great majority, but they are not really unimportant. I am always puzzled by why they think they are allowed to do so, and of course, we remember if we look at the UNIDROIT principles, we remember the preamble, where it says that if the parties have chosen lex mercatoria – which never happens by the way. I have never seen a contract like this. I stand to be corrected, but so far so good – and the preamble of the UNIDROIT says “or general principles of law or general principles of international law”. I personally don’t read into to the general principles of international law the UNIDROIT principles. And I would actually, if one of the parties was quoting the UNIDROIT principles in his memorials when the applicable law chosen by the parties has not said anything, or even has said the general principle of international law, I would always question the two parties to discuss how and why as an arbitrator I should be allowed to import UNIDROT principles. But I am afraid a lot of people don’t do that. I find that a problem.
Michele Graziadei
I would like to return to the point of predictability, which is of course of central importance. By pointing to the fact that there is a conclusion, we can draw from what has been said; that is to say that the same text in different jurisdictions does not show the same legal results. Now, this means that there is an illusion there that must be set aside, and that is that legal certainty depends on adopting the same text for different jurisdictions. The shift should be to have the same meaning across jurisdictions of certain texts.
How do you get that? It is not impossible, but it takes some work. For example, the International Air Travel Association, the IATA, of course has to govern relationships with different customers in different countries, but it is vital that the result is the same, because you cannot run the system unless the systems are the same. To obtain this, they provided standard clauses that were not phrased in the same way, but they achieved the same result in different systems. For example, the clause that obliges travel agents to keep the money separate and to account for that to the air lines.
And in common law jurisdictions you have a clause imposing a trust. In that case, in jurisdictions that don’t have the trust as an institution, you have to spell out very clearly the obligation, and get into the detail of the arrangement so that it will be binding under the local law. If they had simply
reproduced the clause saying “trust” for that jurisdiction, say Italy, it would have been a complete disaster. You can provide parallel texts that have the same meaning, but they have the same meaning because they are not written in the same way.
Gustav Möller
I don’t have the statistics, but in most ICC arbitration cases I have seen there has been an explicit choice of law clause. As to the choice of law rules, I agree that is true that you very rarely see something like that. I had it once in a way, but it was not a pure case. The seller said: This is a sales contract and the law of the seller will apply. The respondent said, “No, it is a construction contract, my law will apply”. So then there was, in a way, a question of a choice of law rule so to say. But I just confirmed that it is true that it seems to be very rare, at least from what I see of these ICC cases. I very rarely see any reasoning relating to choice of law. I have seen, maybe a couple of times, a reasoning as to how the choice of law rule will apply, but the more common route is that you go straight to the proper law.
Aapo Sarikivi
Maybe this is following up still on the issue of choice of law and determining the applicable law in the absence of a choice and the methods available. I think that one important aspect to keep in mind is that it is very much a question of what we perceive the seat as being, and what the limits are that the seat may appose. In the Norwegian Arbitration Act, if I am not entirely mistaken, it is expressly stated that the tribunal shall apply Norwegian conflict rules unless otherwise agreed by the parties. In Estonia, for example, it is actually stated in the Act that the tribunal shall apply Estonian law unless the parties have agreed otherwise. So it is, of course, always something to keep in mind, even though I myself personally am very much an opponent of the voie directe. I feel that it is a great mechanism.
Second part
Giuditta Cordero-Moss
We have now come to the part on how contracts are drafted. Graziadei said something about the ideal solution; that is, to have standard clauses that have different texts to ensure that the meaning is the same in different contexts. I did not know that someone in practice actually had achieved that, but I am happy to hear that. But I think the rest of the world is still struggling with standard texts rather than standard meanings.
What we are going to talk about now is how contracts are written in practice, in particular, in respect of the governing law. Are contracts written as if they were self-sufficient, as if they were in their own
world, just based on their own terms, without having to be subject to any sort of influence from the context that we have heard so much about earlier? Or, are they written in a way that takes into consideration the effects and the impact of the governing law? And, in any case, are contracts written in such a way that every single word and term has been very carefully weighed and
considered, and the interaction with the governing law has really been taken into consideration, and the negotiation has been very careful and so on? Or, are they more copied and pasted without really knowing what was written in there just because you have always done it before and you continue doing that?
We have a mixture here of practicing lawyers and arbitrators who will tell us what kind of
expectations parties have when they write the contract in respect of these matters, and also what kinds of expectations arbitrators have about how contracts have been written in that respect.
The questions here again are twofold. Again, they are very much a part of each other, so it is not necessarily very easy to take them apart. The first question is do drafters rely (or do arbitrators expect that drafters to rely) on an understanding of the contract as it emerges in international practice, like a sort of self-sufficient transnational contract, rather than on the legal effect that a wording may have under the specific governing law? So this first question is – is the contract written as if it were self-sufficient, alone in the world? Or, does it rely on the governing law?
The second question is – is every single term of a contract (or do arbitrators expect that every single term of a contract is) the result of the careful assessment of its legal effects and of detailed
negotiations by the parties? Or, do drafters sometimes take calculated legal risks? Inserting standardised terms without accurate assessments or negotiations?
To introduce the first question, we have Are Brautaset. To introduce the second question, we have David Echenberg.
Are Brautaset
I will actually start introducing the first question by going through some of my experiences with regard to the second question. This leads in better to my points on the first question.
I have experience as an upstream and midstream oil and gas lawyer, and will therefore speak from a practical point of view. If you start in the oil and gas business out in the world, one important contract in many countries is the contract that gives you the right to explore and develop petroleum resources. Such contracts would be with a host country, or more typically with a company of the host country, and will take the form of a production sharing agreement or a petroleum-development service agreement. These agreements are not standard formed contracts that you can pick from the
shelf, but we see that they are very similar, regardless of what country you are operating in, and of what kind of jurisdiction governs the contracts. You find the same economic models, you find the same mechanisms and you find, to a very large extent, the same clauses in the contract. So what do we do? Of course, we carefully assess these contracts, the terms of the contracts and, in particular, the validity and the enforceability of the contracts under the local law. I have to say, even though there are clearly exceptions, the typical route for these contracts is that you have to accept that it is the local host countries’ law that is the governing law. So we typically assess the validity of the contract and the enforceability, but I must admit to a more varied extent, we evaluate each and every clause against the contract law of the country. There could be many reasons for that. One reason is of course the way that these contracts are awarded in many countries. You have to compete in a kind of bidding competition, based on a standard formed contract of that country.
There is, in other words, only limited room for negotiations. You have to accept what is placed before you on the table. Another reason for not checking every term against local law could be that for the specifics of the petroleum industry, of the deal for regulating petroleum activities, you will not find much in the local law. So, it will be more the boilerplate clauses that are left to be checked.
So to the second question. Yes, we take risks here I think, calculated or not, because we have to take these risks. And, in most cases, it luckily goes well, but sometimes we have surprises. One that I have experienced myself is that we were supposed to set up a joint operating company. The governance structure of that company was spelled out in the contract not by us, but by the local, national oil company on the other side. When checking this further, we found that the governing structure, which we had paid some attention to, making sure it was good and suitable for this project, was not legal under local contract law. Luckily, we discovered this in good time, and we could amend this before the company went into operation.
Looking a little bit further outside these host government contracts, we have a lot of commercial contracts related to these projects, and typically we have contracts with our partners and joint venture contracts, typically joint operating agreements, and we could have out-farming agreements.
And if you go further down the chain, there will be special projects for all kinds of facilities that you need to set up and sales contracts. What I try to look for when drafting, is to describe the key functions of the cooperation or the deal as precisely as possible. Because under these types of commercial contracts, you have more freedom, as the parties are sitting together drafting the contract. And then, normally we would not look that much into the applicable law. It is my
experience that if you manage to describe the deal properly, there is not that much room or need for the local law, or more importantly, you would not have that much of a conflict. So, I think that would be the first step, trying for a careful drafting by the parties. And then not looking necessarily to local
law. But, of course, there will be a lot of what are called boilerplate clauses that would come in, and I think again, very often, we do not look at that much of the local law if we have to be under a local law in the country in which we were operating. But, most often, we are free in these types of agreements to agree to different laws, and typically, English law will be the one that is picked. And then, of course, we will make an assessment of these clauses under English law.
Still, it is quite interesting to see whether we have the choice of English law, or if we are forced to adopt the local law: the agreements tend to be more or less identical. These types of commercial agreements tend to be more or less identical. There could be many reasons for that, but I think conservatism in the petroleum business, and I think time pressure are typical factors that decide this.
So again, also on the commercial side, and not only on the host government contract side, I think we take calculated risks, and we often assume that the contract language would be interpreted more or less the same independently of the choice of law, in particular, if we have chosen arbitration as the dispute-resolution mechanism.
And then I come to the first question that I am supposed to address. From what I just have said, you will understand in a way, at least indirectly, that we, at least to some extent, rely on international practice. And with international practice, as far as I am aware, there is no common arbitration practice among oil companies. It is more like the practice among the oil companies and around the world that we rely on. I know there are some attempts that have been made, in writing, based on various arbitration decisions in the field of oil and gas, lex Petrolia, which at least would be used as a customary law. It is not really that which we rely on; what we rely on is that this is something that we have seen many times around the world. It tends to work and it can go even further in the sense that, in particular, with a host government contract, we will recognise a model, a system that we have seen in many other countries. There are variations, there is something lacking, there are differences but still we think it is the same, and we have some kind of trust that it will be interpreted in the same way. I think these kinds of thoughts could be very dangerous, because for us we see a lot of contracts and similarities among those contracts. Host governments will probably not see that – they will only see their own. So at least when you meet the first time for negotiations, they will not bring with them an international experience. So, negotiations can be quite difficult, because they think the contracts have to be interpreted in this and that way. Even though this is not the full answer to all the disputed issues, we have a tendency to argue first, hopefully so that the wording is on our side, and secondly, so that these models are based on this and that type of philosophy, and accordingly, so the contract would have to be interpreted in that way. And then we think it is important that we have arbitration as a dispute-resolution mechanism for that reason, so that we think that we can bring in that common approach to the petroleum contracts when we have the
freedom to appoint the arbitrators that know the business and also have seen these contracts in different jurisdictions. But whether we are right or not, we are not sure, but we think that the elements of international practice are brought in with the arbitrators. At a minimum, even though we are not able to take away the governing law, we can take away the extreme use under the governing law. This is because I think there is a tendency, even though arbitrators normally respect the applicable law, in that they have a legal heritage, a “rucksack” in Norwegian, which they bring with them when they are sitting in on an arbitration, which, in a way, cuts out extreme things and brings some of their own tradition with them. So, what you have, when you have international arbitration, is a more general approach to the interpretation of the contract than you would have under the local law.
David Echenberg
I will break this into four parts. One is to answer the question; two is an introduction and a short philosophical remark; three, just a little bit of background on what I do, because I think it explains point four, which is the long answer to the question.
The short answer to the question, I mean number two, is that drafters sometimes do take calculated legal risks. I think that is probably the key message, and I will come back to this.
I think it is important to bear in mind the differences between common law and civil law. It is an important point, and when I read the comments by the other authors, I was struck by Viggo Hagstrøm’s comments regarding Norwegian law and how it was a very homogeneous set of legal rules, and how they were applied. I was struck by all of the concepts of loyalty and good faith within this harmonious, homogeneous world. And it seemed almost like an intrusion, this
internationalisation that is bringing all of these crazy complicated concepts from abroad. It got me thinking, and I think English law, as a whole, probably had to face many issues that were
international a long time ago, probably because of its maritime nature. So I think one of the philosophical points is that it is important to realise that the construction of English law wasn’t through dealing with a homogeneous group of people, but it was something that was applied for the sale of tea that was shipped from India and maybe sent to Argentina by way of London. So I think that the conceptual starting points are very different.
That was just the philosophical amusement that I had, and I think it is an important point to
remember that almost everyone in this room has a different starting point, and how we interpret, is based on our legal heritage.
What I do, and why it is important, is that I am a lawyer in General Electric, and my title is actually senior risk manager. It is somewhat ironic that I got the word risk in my title, because I think it gives