General principles of law as a supplement to governing law in international arbitration

  • Prof. G.N. Sinha
  • Published 08/08/2023
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General principles of law as a supplement to governing law in international arbitration

In international arbitration disputes, arbitral rules and party autonomy allow parties to choose governing law or substantive law applicable to one of the parties to the contract to govern their substantive disputes. Besides freedom of parties to choose governing law of a particular jurisdiction, they often specify that ‘general principles of laws’ will also apply in addition to substantive law of one of the parties in the contract. Moot question is why parties specify application of general principles of law in addition to governing law of a particular jurisdiction and what is meant by ‘general principle of law’ for governing the disputes and why parties take recourse to it in addition to governing law applicable to one of the parties in the contract.
 

Understanding General Principles of Law

General principle of law refers to a principle that is recognized in all kinds of legal relations, regardless of the legal system to which it belongs. In International law, it refers to a principle that gives rise to international legal obligations. The adjective ‘general’ indicates that they are principles, which are applied generally in all cases of the same kind, which arise in international law. For example, the principle of non-intervention, pacta sunt servanda, equity, etc.
 

General Principles of Law under ICJ Statute

Article 38, paragraph 1(c) of the Statute of the International Court of Justice uses the wording, “general principles of law as recognized by civilized nations” and recognized it as a source of law. However, the question of the origin of general principles of law as applied at the international level has also been a matter of controversy. The common perception is that these principles find their origin in the domestic legal systems. Once there is a conviction that some of these general tools are commonly shared principles that can be found in many domestic systems, they can also be applied in international law. They are logical inferences that can be found in any legal system: the principle of reparation for caused damage, the principles of interpretation of rules, or those used for the resolution of conflicts of rules; many of them known through Latin maxims are good examples like Audi alteram partem, actori incumbit onus probandi.
 

Reasons for applying General Principles of Law

Applicability of general principles of law is quite common in international arbitration to supplement national law of one of the parties in the contract. Reasons for including general principles of law are varied. One reason may be the infirmity of the law of a jurisdiction to which one party in a contract belongs to. Such weakness may jeopardize their international trade and investment business. Some international laws may not be sufficiently developed to provide a basis for international transactions; sometimes even sophisticated national systems may be conducive only to domestic transactions.  Thus parties choose the applicability of ‘General Principle of Law’ either to supplement the choice of law or to avoid it. Parties refer to ‘General Principle of Law’ with the belief that it will ensure neutral outcomes. This choice made by the parties grants the arbitral tribunal more discretion with respect to the applicable law.
 

Some fetters on the powers of a Sovereign

Applying general principles of law also insulates an investor in a host country as it applies some fetters on the powers of a sovereign country to amend laws to the disadvantage of one of the parties in a contract. However, a sovereign country can amend its governing law in the public interest with the responsibility to grant equitable compensation to a party of the contract who invested funds in a host country or set up business in a host country. A sovereign also changes its governing law to earn more profit for the state and its home companies. Applying general principles of law as a supplement to governing law makes ground for various remedies like restitution, reparation, and compensation on equitable principles. However, because of its broad scope and lack of elaboration in the literature, results become unpredictable and parties to agreements have little ground on which to base their expectations. Therefore, for proper utilization of the ‘General Principle of Law’ arbitrator is required to conduct an initial inquiry to determine the nature of general principles invoked by the parties. Equitable compensation was followed in many international arbitration disputes like LIMACO arbitration, Amin Oil arbitration, Texaco and Saffire arbitration cases.
 

General Principles of Law applicable in International Arbitration

Over the period of time, some of the principles recognized and frequently used in international arbitration acquired the status of general principles of law applicable in international arbitration. These include a sovereign government may make and be bound by contractual agreements with foreign private parties, the corporate veil may be pierced to prevent a beneficial owner from escaping contractual liability, force majeure may justify non-performance of a contract such that the loss is borne by the parties, contracts that seriously violate good morals or international public policy are invalid, equitable compensation constitutes the primary remedy for damages, the rights of property and of acquired vested rights are generally inviolable-a state cannot take it without equitable compensation, and a party may not receive unjust enrichment.

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G.N. Sinha
Prof. G.N. Sinha

The writer is G N Sinha, Professor, UPES School of Law

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