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Company “Samurai” based in Nipponland and company “Warrior” based in Freiland made an agreement on trade transactions with an arbitral clause. Prior to the agreement companies went through lengthy negotiations, most of the negotiations were done in English orally in various places or in written form electronically (but some still in other languages) on the globe and the final agreement was struck in England. The contract was made in two languages, English and Japanese with a clause that both texts are identical and authentic. The chosen apllicable law for the contract was Japanese.
Later a dispute arised and “Samurai” decided to file a suit to an arbitration court. In the course of the proceedings a question arised as to the meaning of one of the clauses in the contract, it happened that the meaning was different in English and Japanese. “Warrior” insisted that the clause is to be understood as it is written in English, because most of the negotiations were done in English. As to that matter, the applicable law should also be English, because it was obviously the real will of the parties, as English text is easier to understand using English law. The provision on Japanese law was an error in judgement and is no to be used actually. On the other hand, “Samurai” insisted that it’s impossible to use English text because the applicable law chosen was Japanese, so they should use Japanese text instead.
One of the arbitrators mentioned that the applicable law and the language of the contract are two separate matters, so the right decision would be to go with the English text and Japanese applicable law.
Other arbitrator said that this discrepancies in the text are impossible to solve so it should be concluded that no law was chosen at all and the court should choose an applicable law using rules of conflict. As to the text, the tribunal should go with an English text, because the negotiations were done mostly in English, translation to any other language if necessary or translation of an applicable law to English shall be provided by the parties.
The third arbitrator said that what matters most is the language of the proceedings, so the chosen text should be the same as the language of the proceedings. As to the applicable law, there’s no question that Japanese law should be applied.
Is there a correlation between an applicable law and an applicable language of the contract and language of the proceedings? What’s that correlation, if any? Who is right and why? What’s your opinion on the matter?
DECISION:
On the basis of Article 22 of the UNCITRAL Model Law on International Commercial Arbitration (hereinafter – Model Law) «the parties are free to agree on the language or languages to be used in the arbitral proceedings. Failing such agreement, the arbitral tribunal shall determine the language or languages to be used in the proceedings. This agreement or determination, unless otherwise specified therein, shall apply to any written statement by a party, any hearing and any award, decision or other communication by the arbitral tribunal».
Article 19 of the Model Law provides the same: «Subject to an agreement by the parties, the arbitral tribunal shall, promptly after its appointment, determine the language or languages to be used in the proceedings».
On the one hand, both text are authentic. But there is not a “prevailing language” clause in the contract. Therefore, it is necessary to refer to correspondence between the parties. As the correspondence between the parties was in English, English law should be applied. Because if the parties could fluently coordinate the conditions of the contract in English, they can participate in the arbitration proceedings, conducting in English.
On the other hand, the parties have explicitly expressed their will, choosing as the applicable law of Japan. Based on this position, the prevailing version of the contract should be in the Japanese, because then it will be easier to the tribunal to understand the provisions of the contract, applying the law of Japan. Probably, the cost of translation by using a foreign language and foreign law by the arbitrators will be substantially less.
In the context of the case it is stated that foreign trade operation took place. Therefore, we can refer to the Convention dated 22 December 1986 on the Law Applicable to Contracts for the International Sale of Goods (hereinafter – Convention 1986. Under Article 7 of the Convention 1986 «the contract of sale is governed by the law chosen by the parties. The parties' agreement on this choice must be explicitly expressed or directly follow from the terms of the contract and the conduct of the parties, considered in their totality. This choice may be limited to part of the contract». Article 8 of the Convention 1986 states that «the agreement governed by the law of the State where the buyer at the time of the conclusion of the contract has his place of business, if the negotiations were conducted, and the contract was signed by the parties, is in this state».
There is no information about «Warrior»’s place of business. But if we assume that all prerequisites set forth in the Convention 1986 were met, then we can apply English law to the contract. On the other hand, if there is no place of business, then the law chosen by the parties should be applied, which is the Japanese law.
According to Professor A. Asoskov in the article «The law applicable to contractual obligations: European Reform and the Russian private international law»: «Selection of the language of the contract is usually dictated by considerations unrelated to the applicable substantive law. For example, in contemporary international trade English language has acquired the character of a universal method of communication, so its use as a language of the contract is not able to clarify the question of whether the real will of the parties was to use or not, for example, English law. Bearing this in mind we should come to the conclusion that such a factor, as the language of the contract, in most cases, can not be regarded as an indicator of an implied choice of law». Therefore, the «Samurai»’s argument is incorrect in the part it connects the applicable law and contract language.
The arguments of the first arbitration are correct. First, as noted by Professor A. Asoskov, applicable law and the language of the contract are not directly linked. Secondly, according to the Article 28(1) of the Model Law «the arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute». Parties have a full autonomy, which implies the possibility to choose any applicable law. In this situation, the parties have chosen as the law applicable to their contract, the law of Japan, unless there is a commercial center of activities, when the law of England will be applied.
The first part of the argument of the second arbitrator is incorrect. If Nipponland and Freiland are the parties of the European Convention on International Commercial Arbitration of 1961, then Article 7 of it can be applied, which provides that «the parties shall be free to determine, by agreement, the law to be applied by the arbitrators to the substance of the dispute. Failing any indication by the parties as to the applicable law, the arbitrators shall apply the proper law under the rule of conflict that the arbitrators deem applicable». In the case at hand, the parties have chosen the applicable law by themselves. Therefore, the arbitral tribunal’s power to determine the law is limited by parties’ agreement..
The second part of the argument of the second arbitrator is also incorrect. He offers to translate the text in English by efforts of the parties. According to the Article 23 of the Rules of the International Commercial Arbitration Court at the Commerce and Industry Chamber of the Russian Federation: «At the request of the parties and at the expense of ICA can provide its services of an interpreter at the oral hearing». This position is consistent with the recommendations contained in the Article 19 of the UNCITRAL Notes on Organizing Arbitral Proceedings (1996): «If interpretation will be necessary during oral hearings, it is advisable to consider whether the interpretation will be simultaneous or consecutive and whether the arrangements should be the responsibility of a party or the arbitral tribunal. In an arbitration administered by an institution, interpretation as well as translation services are often arranged by the arbitral institution». Therefore, it is a right, not a duty of a party in the arbitration. Only at the request of the parties the arbitral tribunal may appoint an interpreter. In this case, the arbitrator may require the parties to pay for the translation from the English, but it is the right of the parties. Therefore, this argument is incorrect.
As a general rule, the parties are free to determine the language of the arbitral proceedings. If the parties did not choose the language of the arbitration, the choice of language should be made on the basis of the institutional rules. For example, Section 10 of the Rules of the International Commercial Arbitration Court at the Commerce and Industry Chamber of the Russian Federation states that: «The hearing is conducted in Russian. With the consent of the parties the Tribunal may hold a hearing and in another language». However, not all of the institutional rules provide for similar provisions. Thus, Article 16 of the ICC Arbitration Rules (1998) and Article 23 of the ICC Arbitration Rules provide that determining the language of the proceedings is at the tribunal’s discretion. On the opposite, Article 17 of the LCIA Arbitration Rules (1998) gives priority to the language of the arbitration agreement. If the agreement was drafted in more than one language, this problem is solved by the panel.
We can also involve the doctrine. According to the Professor S. Bakhin’s article «Res judicata: state courts and international commercial arbitration (the correlation between state and arbitration jurisdictions)»: «If the parties have not stipulated anything then the respective provision of the institutional rules comes into effect and every rules provides for arbitration in the local language. We may require that the arbitration which takes place in the Russian Federation held in English, French, Chinese. The only thing - we need to understand that it will be expensive».
On the one hand, we can be guided by the position of Professor S. Bakhin. Then the language of proceedings is not very important, because if the parties do not choose a language, then the tribunal will determine the language by itself.
On the other hand, the correctness of the argument about the importance of the language of proceedings must be assessed in terms of the applicable institutional rules, which takes up the case.
With respect to the applicable law. According to the Article 28(1) of the Model Law: «The arbitral tribunal shall decide the dispute in accordance with such rules of law, which are chosen by the parties as applicable to the substance of the dispute." Parties have a full autonomy, which implies the possibility to choose the applicable law. Only on the basis of the Article 28(2) of the Model Law: «In the absence of any indication parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable». A similar provision is contained in Article 7 of the European Convention on International Commercial Arbitration of 1961: «The parties shall be free to determine, by agreement, the law to be applied by the arbitrators to the substance of the dispute. Failing any indication by the parties as to the applicable law, the arbitrators shall apply the proper law under the rule of conflict that the arbitrators deem applicable. In both cases the arbitrators shall take account of the terms of the contract and trade usages». The parties have chosen the applicable law, hence there is no need for the tribunal to make such a choice.
On the one hand, in this situation, the parties have chosen the law of Japan to be applied to the substance of their contract.
On the other hand, the Convention 1986 provides that the applicable law should be the law of the country where the party has its place of business and where the negotiations were conducted. We do not know whether the place of business was in the country where the negotiations were conducted. If it is so, the law of England should be applied.
Taking everything into conclusion, it can be considered that the applicable law, contract language and the language of the proceedings are independent and not always closely related categories. The position of the first arbitrator is the most correct. He believes that the applicable law and the language of the contract is two completely different category, so the best solution would be to apply the English text and Japanese law. It is true, because parties explicitly chose the applicable law of Japan exercising their autonomy, and the prevailing version of the contract is English, because the correspondence was carried out mostly in English. Thus, the English language will be clear to both parties.