What is Transnational Law?
National approaches to international arbitration are often seen with reluctance. If anything, international arbitration is a legal field which encourages less national and more ‘transnational’ attitudes. The aim of this short piece is to explore manifestations of the use of transnational law in the context of international arbitration. More concretely, this blog will elucidate the meaning of transnational law in accordance with the application of general principles of fairness, such as ex aequo et bono (according to the right and good).
First, we must modestly attempt to set out the meaning of ex aequo et bono as part oftransnational law to then focus the discussion on certain examples found in international arbitration. To do so, we should understand international arbitration as the product design of ‘cross-border commercial justice’, seeking to align its practices to universal axioms across legal frontiers. This means that international arbitration has incubated a space in which commercial parties from different legal cultures have the possibility of shaping a dispute resolution process which is not strictly bound by domestic rules of law. Instead, disputing parties can allow arbitrators to decide the merits of a dispute entirely based on general considerations of ‘good conscience’ and ‘fundamental fairness’.
In the same vein, transnational law is: “all law which regulates actions or events that transcend national frontiers” [i] and it is in this context of universality, where ex aequo bono fits as an example of translational law. This is because ex aequo et bono is placed 'outside national law’ involving decision-making elements based on universal fairness and justice beyond the realm of established legal rules.
The Operation of Ex Aequo et Bono as Transnational Law
The application of ex aequo et bono by arbitration tribunals is only possible when the tribunal is expressly authorised by the disputing parties. Therefore, the use of ex aequo et bono is an extension of party autonomy.[ii] It is also important to be honest with the reader and mention that, the application of ex aequo bono is not a default common practice, particularly because complex commercial transactions require legal certainty and arbitration users often opt for clearer normative commercial guidance beyond general principles of fairness.
There is, however, a unique value in choosing ex aequo et bono; it unbounds the decision-maker from the rigidness of positive law and allows inclusion of good commercial practices as standards of good faith and fairness.[iii] The main motivation behind the choice of ex aequo et bono is to resolve the dispute in an expertly, informally, expeditiously, and fairly manner rather than according to the law so that the results are fair to the parties considering the usages and practices. [iv]
Therefore, ex aequo et bono could operate in two different scenarios:
(1) To disregard a law that seems unjust in a particular situation.
(2) New standards and policies that seem desirable but have not been crystalized in laws.[v]
It could be argued, for example, that there is a benefit to the use ex aequo et bono in energy contracts, as it will potentially allow arbitrators to address issues in transactions where the law is undeveloped, inadequate, or unsuitable to resolve disputes. By way of reference, in gas pricing disputes, the doctrine of ex aequo et bono will allow arbitrators to create a new pricing formula in light of changes affecting the value of the gas obtained by a ‘prudent’ gas company to let the buyer market the gas ‘economically’.[vi]
Amiable Composition, Ex Aequo et Bono and Public International Law
There are other examples of transnational law in international arbitration, as a matter of fact, commentators have argued that concepts such as amiable composition and ex aequo et bono are artificially divided.[vii] While it is true that these concepts have been used interchangeably; amiable composition and ex aequo et bono may not be coextensive in all minds, yet both are part of transnational law.[viii] Amiable composition starts at rule of law, departing only if is needed to achieve a just result, while ex aequo et bono has a broader outreach given its private sense of justice, which is based on a reasonable view of the facts, the contract and what the law provides.[ix] However, in practice, all these notions as part of transnational law; aim to arrive to fair results.[x]
Historically, ex aequo et bono decisions were only for non-legal disputes or regarded to fill in the gaps in international law, but it is now solely understood to resolve a legal dispute considering either ethical, social or a cultural context which forms part of the applicable law within a relevant legal system.[xi]
The best example of ex aequo et bono as a universal principle of fairness is the International Court of Justice Statute, Article 38(2), which refers the power of the ICJ to decide a case ex aequo et bono. Nonetheless, the ICJ has never decided a case exclusively on ex aequo et bono, perhaps because it might lead to strong political implications and diminish a strictly law based decision-making process. [xii] The influence of PIL over international law, is what has enabled ex aequo et bono to be particularly useful for international investment relationships due to the socio-economic and cultural aspect evolving long-term investment transactions. As an investment project is performed over time, new circumstances that were originally not relevant are likely to arise especially through economic, political, and technological developments.[xiii] A judicial solution that is fair and suitable given the changed conditions may have to go beyond the legal framework than the domestic legal parameters originally laid down.[xiv]
International Investment Treaty Practice and Law
In the context of investment treaty law and practice, there is a normative formulation which crystalizes the concept of ex aequo et bono. ICSID commentators have explained that the reading of Article 42(1) and (2) considers the possibility of applying the doctrine of ex aequo et bono as part of the applicable law, whichdisplays an amorphous type of body of law which encompasses the legal principles of equity and fairness.[xv]
Similarly to the abovementioned general application of ex aequo et bono, under ICSID arbitration, a decision based on this principle without the parties’ authorization, is a failure to apply the proper law and would amount to an excess of the tribunal’s mandate.[xvi] Any resort to ex aequo et bono only occurs if the parties expressly choose it in submission for, or in addition to, their choice of law.[xvii] Therefore, the choice of the parties to adjudicate ex aequo bono must be expressly made and not implied. [xviii]
An illustrative example of parties’ agreement on ex aequo et bono in ICSID arbitration is Atlantic v Guinea. In this case, the Respondent entered into a Management Agreement with the Claimant. The Management Agreement, inter alia, provided an arbitration agreement which referred to ICSID arbitration and the disagreement should be settled ex aequo et bono. Further, under Article 14 of the Management Agreement, the applicable law was Guinean Law (which the parties recognized as identical to French law prior Guinea's independence in 1958).[xix] The arbitration agreement included parties' express authorization for the tribunal to decide ex aequo et bono. [xx]
The Tribunal decided to apply ex aequo et bono when deciding some of the claims made by the investor. For example, the Claimant requested to the tribunal to pay administrative costs plus damages. Among other reasons, the Respondent opposed to this claim and primarily alleged that after a certain period, the project was virtually stopped and "the following months were devoted not to the management of the project but to the study of measures of adjustments". The Respondent argued that by not having received any services it cannot be held to pay the management fees.[xxi] The Tribunal concluded that it would not seem equitable to impose upon Guinea payment of management fees for that certain period. Additionally, the Tribunal found, that the Claimant did not give evidence of all necessary due diligence to operate the ships, particularly because it represented itself as a specialist in the industry. Due diligence, according to the tribunal, would have allowed the Claimant to have greater care in the operating conditions and consider local circumstances in Guinea. Therefore, the Tribunal ruled ex aequo et bono and considered it equitable to reduce the balance of the management fees owed by the Respondent. The tribunal also applied ex aequo et bono when deciding the Claimant's claims regarding arbitration fees and expenses. The parties requested reimbursement by the other party of its arbitration fees and expenses. In applying ex aequo et bono, the Tribunal found that neither party have shown to have acted in bad faith and the Tribunal deemed equitable that each party should assume its own fees and expenses incurred in the proceedings.[xxii]
In the Klöckner v Cameroon case, the arbitration agreement did not have choice-of-law clause and no authorization to decide ex aequo et bono. The Tribunal found that under ICSID Article 42(1), it had to apply the civil and commercial law of Cameroon based on French law.[xxiii] The discussion of some of the basic principles was not substantiated by any reference to Cameroonian, French or other national legal systems nor to international law.[xxiv] The Klockner final award was heavily criticized as there was absence of any information, evidence or citation to the applicable law (i.e. French Law). The ad hoc committee, which reviewed this award, found it difficult to accept that the decision was based under French civil law. Rather the decision seemed based on equity and the committee considered that the Tribunal acted outside the framework provided in Article 42(1).[xxv]
A more balanced approach was the ad hoc committee in Amco v Indonesia, which concluded that a tribunal did not necessarily decide based on ex aequo et bono if it does not cite detailed legal authority for a particular finding.[xxvi] In examining Amco’s license to invest in Indonesia, the Tribunal found that the procedure followed was contrary to Indonesian regulations but also against general principles of due process. In this case, the ad hoc committee refused to accept that every reliance on broad principles or equitable considerations amounted to ex aequo et bono. Contrary to Klöckner, the committee did not expect the Tribunal to refer each finding or conclusion to the applicable law by specifying the legal rule on which such finding rests. In addition, the committee concluded that general standards of Indonesian law were functionally equivalent to what the tribunal meant by ‘fundamental principles of due process’. [xxvii]
Criticisms of Ex Aequo et Bono as Transnational Law
The use of Transnational Law from the perspective of ex aequo et bono has not gone uncriticised as its usage by disputing parties has decreased in international arbitration. Ex aequo et bono main pejorative is the possibility of arbitrators deciding outside the law and wrongly deciding contrary to it.[xxviii] The danger runs in the perception of decision-maker recasting itself into powers it ought not to have and replacing norms with open conceptions which might jeopardize its judicial mandate.[xxix] These criticisms have discouraged decision-makers and adjudicators from pursuing a fair resolution when is most needed; which is when the law fails to react adequately for justice.
Ex aequo et bono is not arbitrary, it is a functional doctrine aiming to resolve realistic but complex problems. The decisionmaker is not asked to disregard the law but to exercise judgement on the practical and fair reasons by which to decide each case. If anything, ex aequo et bono limits any possibility of arbitrary will from the decision-maker however and makes commercial parties more aware of shortcomings in written law. Therefore, ex aequo et bono provides for systemic corrections of these shortcomings by rationalizing the discretionary powers of the decision-maker. [xxx]
Limits to Ex Aequo et Bono
Public policy and ius cogens probably constitute an outer limit for the tribunal’s discretion (i.e., prohibitions of slavery, terrorism and other violation of human rights) or that violate the Security Council resolutions under Chapter VII of the United Nations Charter. The domestic law of some states might not permit arbitrations ex aequo et bono.
Even when parties would have authorized the tribunal to decide ex aequo et bono were subject to a choice of law that prohibits the application of the doctrine, the tribunal’s power to use equitable principles would not be affected Article 42(3) provides that the tribunal’s power to decide ex aequo et bono is not prejudice by the selection of the proper law in accordance with Article 42(1). In other words, an agreement authorizing the tribunal to decide equitably in accordance with Article 42(3) would to that extent derogate from contrary provisions of the law which is otherwise applicable under Article 42(1).[xxxi] ICSID tribunals have been generally cautious on the application of ex aequo et bono, parties’ authorization to decide ex aequo et bono does not give to the tribunal unlimited discretion. ICSID tribunals have the obligation to state the reasons upon the award is based Article 48(3) ICSID Convention, failure to explain reasons might expose the award to be subject of annulment under ICSID Article 52(1)(e).
The scope of ex aequo et bono is delimited by the practices which have crystalized in common usages, shared habits, and customs (i.e., UNCITRAL Article 33: “shall take into account the usages of the trade applicable to the transaction”). Ex aequo et bono cannot be an a priori principle of law, instead it requires to give attention to the practices of the parties which have become common usages, shared habits, and emerging customs. This means that ex aequo et bono is a doctrine which exercises fairness against based on the background of the rational actors exercising their free will.[xxxii]
The exercise of ex aequo et bono has also internal limits, decision makers also need to apply this doctrine based on ‘fairness’ and ‘good conscience’ which might not be necessarily attributable to law.[xxxiii] Application of practical reason rather than strict legal principles, it must be based on objective and rational considerations expressly stated.[xxxiv] Arbitrators must show respect to the expectations expressed in the contract or treaty; where specific norms – possessing more legal clarity – will always compete with more general understandings of the law.
Arbitrator’s legitimacy starts with the parties’ agreement, which includes ex aequo et bono striking the balance between bias a fairness, between a commercial disadvantage suffered by one of the parties while respecting state’s regulatory powers.
[i] Jessup, Phillip. C, Transnational Law, Yale University Press (1956).
[ii] Taida Begic, Applicable Law in International Investment Disputes, Eleven International Publishing, 2005.
[iii] Christoph Schreuer, Decisions Ex Aequo et Bono Under the ICSID Convention, 11 ICSID Review – Foreign Investment Law 1 (1996), 37-63.
[iv] Leo E. Trakman, The Law Merchant: The Evolution of Commercial Law, Rothman (1983), 33
[v] Louis B. Sohn, Equity in International Law, 82 Proceedings of the Annual Meeting (American Society of International Law) 20-23 (1988), 277-291.
[vi] William Park, The Application of Substantive Law by International Arbitrators, Fabiolo Bortolotti and Pierre Mayer (eds.), Dossiers ICC Institute of World Business Law in p. 66
[vii] Park, 98
[viii] Trakman, 621 and Park,95
[ix] Philippe Fouchard, Emmanuel Galliard and Berthold Goldman, Traité de l’arbitrage commericla international (1996), 836-837 and Park 96
[x] Trakman 641
[xi] Schreuer, 38 and Diversion of Water from the Meuse [Netherlands v Belgium] [Individual Opinion by Mr Hudson] PCIJ
Series A/B No 70, 73;
[xii] There are other examples in the field of public international law, for example Article 293(2) UN Convention on the Law of the Sea refers to the power of the tribunal to have jurisdiction to decide ex aequo et bono if the parties so agree.
[xiii] Schreuer, 40
[xiv] Schreuer, 40
[xv] Trakmann 635 and Benvenuti & Bonafont Srl v People’s Repiblic of the Congo, pp. 338-342.
[xvi] Which case says this ?
[xvii] Broches, A Covention … p 666
[xviii] Lauterpacht, The Functions of the Law, p 379
[xix] Atlantic Triton Company Limited v People's Revolution Guinea, ICSID Case No. ARB/84/1, 3 ICSID Reports 17,para 9 and Taida Begic, p 222
[xx] Atlantic Triton Company Limited v People's Revolution Guinea, ICSID Case No. ARB/84/1, 3 ICSID Reports 17.
[xxi] ibid
[xxii] ibid, Section V
[xxiii] Klocker, 59
[xxiv] Schreuer, 54
[xxv] ibid, ‘The absence of references to positive rules on French law in the relevant portion of the Award clearly is a flaw” p 58.
[xxvi] ibid, 61
[xxvii] ibid, 60
[xxviii] Trakman 626
[xxix] ibid
[xxx] ibid, 640
[xxxi] By contrast, Article 55(2) of the Arbitration Rules governing ICSID Additional Facility, provides that the Tribunal may decide ex aequo et bono if the parties have expressly authorized it to do so and if the law applicable permits.
[xxxii] Trakman, 637
[xxxiii] ibid, 638
[xxxiv] Sohn, 331 and Scheurer 51
