III. To the Substance of the Dispute
In principle, the law applicable to the substance of the dispute is to be determined in accordance with the law or the rules applicable to the arbitral procedure. No matter if the parties chose a specific national procedural law or a set of institutional arbitration rules, they usually all have in common that they determine that the arbitral tribunal has to apply the law agreed upon by the parties.
As mentioned before, the term “law”, as applied in the context of international commercial arbitration, has a very broad meaning, which means that it is usually not limited to any national substantive laws. Many arbitration rules clarify this by stipulating that the arbitral tribunal shall apply “the law or rules of law” agreed upon by the parties with regard to the substance of the dispute. As a consequence, parties may also choose transnational laws, international law principles or the rules of international conventions for example. These comprise, among many others, the lex mercatoria, which is not based on a specific legal system but incorporates international commercial rules, general principles of law, standards, and trade usages; or the Principles of International Commercial Contracts (PICC) drawn up by UNCITRAL. Furthermore, the parties may split the law applicable to the substance to several issues (so-called “dépecage”) or even determine that the tribunal may render a decision based on mere reasonableness and fairness, i.e. without strictly applying any specific law (“ex aequo et bono”, or as “amiable compositor”). Yet, since most of those options make the outcome of the proceedings less foreseeable for the parties, most parties will rather opt for a national or international law (such as the CISG) applicable to the substance of their case.
If the parties made no choice as to law applicable to the substance of their dispute, most laws or rules applicable to the arbitral procedure include a provision according to which the arbitral tribunal shall determine the law applicable to the substance of the dispute. In most of the cases, this means that either the arbitral tribunal has to determine the conflict-of-law rules it considers appropriate according to which, in a second step, it has to determine the applicable law or rules of law to govern the substance of the case, or it may directly apply the law or rules of law to the substance, which it considers appropriate – without having to determine any applicable conflict-of-law rules first.
Yet, even though the arbitral tribunal in essence has to apply the law or rules of law applicable to the substance of the dispute (be it by choice of the parties or in the absence of such by determining the respective law or rules of law), it again may be well advised to pay attention as well to the substantive law of the country of the seat of the arbitration and the enforcement country. For any award based on the applicable substantive law that violates the public policy of the forum state or the enforcement country, might be set aside or refused enforcement (cf. Art. 34 Section II lit. (b) UNCITRAL Model Law and Art. V Section 2 lit. (b) New York Convention).