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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
Introduction
1. As arbitration law develops, arbitrators are increasingly required to mark out the boundaries of contractual freedom or step beyond the contractual sphere. For a long time, it was thought that matters related to public policy could not be settled by arbitration, and there is still a belief that arbitrators are less forceful than courts in upholding consumer rights. However, one need only look at a handful of awards to see that parties no longer have any qualms about claiming in tort.
2. There are various reasons why parties claim in tort. A tort may simply have been committed in the context of their contractual relations. Strategically, claims based on tort may be introduced to elude time limits otherwise applicable, to threaten the opponent, or to deny the arbitral tribunal the power to hear the case. 1 Rarely, however, is tort the basis of a party's main claim. 2 It is more often used to inflate claims3 or as means of counter-attack, i.e. as an additional claim or a counterclaim, rather than as the prime or sole cause of harm underlying the arbitral proceedings.
3. The torts we have found in ICC cases include the following: 4 unlawful competition, 5 trademark infringement, 6 deliberate failure to pay, 7 trespass to land or goods and/or conversion of property, 8 fraudulent misrepresentation, 9 tortious interference with contractual relations, 10 infringement of trade secrets, 11 unfair termination, 12 rumours of bribery, 13 retaliations and abusive acts committed during previous arbitration proceedings in order to influence those proceedings and cause the claimant to withdraw its claim, 14 abuse of process, 15 pre-contractual liability or culpa in contrahendo, 16 libel, 17 defamation, deceit and breach of negotiations. [Page40:]
4. Although tort is no longer uncommon in arbitration, consideration must nonetheless be given to the specific issues it raises at the various stages of the proceedings. These stage include characterization, arbitrability, jurisdiction, applicable law and assessment of damages. Its specificity is not always respected in practice, as many arbitrators, for example, simply extend the law of the contract to tort without going into detail, or avoid classifying an issue as a tort (e.g. unfair competition) and award damages on contractual grounds. 18
5. There are many highly enlightening ICC arbitral awards relating to tort. Extracts from awards rendered by arbitral tribunals in ten ICC cases are reproduced after this commentary, which will be divided into two parts dealing respectively with jurisdiction and applicable law.
I. Jurisdiction
6. Claims in tort are rarely considered to be beyond the powers of the arbitral tribunal. 19 However, four initial steps need to be taken as a prerequisite to examining tort issues in arbitral proceedings. The issue in question first needs to be characterized as a tort (A). It must furthermore be capable of settlement by arbitration (B) and it also depends on the construction of the arbitration clause (C) and the wording of the terms of reference (D).
A. Characterization
7. How an issue is characterized will depend on the legal system to which reference is made (which will often be that of the contract) and whether or not the issue may be characterized as both contractual and tortious.
8. The first thing the arbitral tribunal needs to do, even before considering arbitrability and its jurisdiction to hear the case, is to decide whether the issue before it is a tort. 20 To this end, it must restate the facts in legal terms, that is to say put them into legal categories. State courts do this by referring to the categories laid down in the legal system to which they belong (lege fori characterization). As arbitrators, on the other hand, do not have a for, they must designate the system to be used for this purpose.
9. Of the choices available to arbitral tribunals, the simplest and most frequent is to refer to the legal system of the contract, i.e. to use the legal categories of the law governing the contract. 21 Sometimes, however, reference is made to the legal categories of other systems. In ICC case 5607, 22 for instance, the arbitral tribunal decided that the facts should be categorized according to Austrian law, which it regarded as its lex fori (through a misuse of language), despite having previously interpreted the parties' choice of Austrian law as covering procedure and rules of conflict, but not substantive issues. [Page41:]
10. In actual fact, arbitrators often simply declare the issue before them as one of tort without going through the procedure of classifying it as such. There is a risk that this kind of postulation or even intuition, most certainly dictated by the arbitrator's legal background, will undermine the clarity of the arbitrator's reasoning, reducing predictability for the parties, especially the potential tortfeasor. Besides, it may be that the same facts are classified as either contractual or tortious, or both, which raises the problem of concurrent categories.
11. An initial word of explanation from the perspective of comparative law is necessary. It is frequently said that the common law allows a single issue to be classified as both contractual and tortious but that this is forbidden in civil law. Both statements are wrong and we shall seek to explain how the two legal traditions have a different approach to the question.
12. Contrary to received thinking, whilst the common law allows for two actions to be brought in connection with the same loss, under no circumstances may this lead to double recovery. The possibility of bringing both contractual and tortious claims simply means that a party is entitled to plead on both grounds at the same time without giving one priority over the other.
13. The real difference thus lies in the right to choose, which is normally forbidden in civil law. 23 In this respect, civil law is more restrictive: it considers that contractual liability is more specific than tortious liability, which arises from a general duty laid down in the ordinary rules of law, and that the former therefore takes precedence over the latter. In other words, once two parties have entered into a contract, any action brought within the sphere of their contract must be based on contractual liability. 24 Only on very rare occasions may they choose to bring an action in tort instead. 25
14. This does not of course exclude the fact that a party may additionally bear tort liability for a different set of facts, or at least for harm that is distinct from that which gave rise to contractual liability. In such cases, double remedy, as opposed to double recovery, 26 is available, as it is in the common law, provided that there is a separate harm27 that is not caused merely by the failure to perform an obligation arising out of the contract. 28 The fact remains, however, that claims made simultaneously in contract and in tort are less frequently admitted in civil law than in the common law. [Page42:]
15. Just how sensitive a subject the characterization of claims may be is illustrated by ICC case 7864. When awarding damages in its final award, the arbitral tribunal did so on the basis of tort rather than on contractual grounds, but did not warn the parties of this. The final award was partly set aside for failing to comply with the principle of due process. 29
16. In any event, once a claim has been classified as relating to a tort, two further questions need to be addressed. Is the claim capable of settlement by arbitration and does it come within the scope of the arbitration agreement?
B. Arbitrability
17. The arbitrability30 of tort issues is a complex matter. The law applicable to the arbitration agreement cannot provide a complete answer; consideration may also need to be given to the law governing the tort itself. 31 Although in theory the question of whether or not a dispute may be submitted to arbitration is determined by the law governing the arbitration agreement, this observation needs to be qualified. It may be that the contract and the arbitration clause are governed by one and the same law, as the 'separability' of the clause does not necessarily imply a different governing law from that of the contract. 32 Also, the arbitration clause remains an auxiliary provision of the contract in which it is contained and cannot ignore the substantive rights at issue and their arbitrability within the meaning of the law applicable to the underlying relationship (main contract or tort). Consequently, if there are mandatory rules establishing the law applicable to the rights at issue (as is the case, for instance, with torts resulting from competition law), the public policy law applicable to those rights must also determine whether or not they are arbitrable. 33 Otherwise, it would always be possible to circumvent the non-arbitrability of substantive rights by applying a different and less strict law to the arbitration agreement.
18. In short, if the underlying relationship (main contract and/or tort) and the arbitration clause are governed by at least two different laws34 and the rights at issue have a mandatory connection with a particular jurisdiction, the law governing the arbitration clause should not have the overriding importance usually given to it. Any rigorous arbitrator should take all these different laws into consideration and give priority to the most restrictive of them. Furthermore, if the laws applicable to the fundamental relationship and the arbitration clause are different from that of the country where the arbitration is seated or enforcement is sought, the latter will also need to be taken into account in order to be certain that they allow tort issues to be settled by arbitration. 35[Page43:]
19. After it has been decided which laws need to be consulted for the purpose of ascertaining whether or not a tort is arbitrable, there may still be difficulties as national statutes do not always contain explicit provisions on the question. 36 This is true of French law, for instance, which would appear to allow for the arbitration of torts, without saying so explicitly. As noted in the final award in ICC case 7924: 'French substantive law does not provide that tort claims are necessarily beyond the scope of arbitration Whether a claim in tort is arbitrable, is merely a question of the wording and the interpretation of the arbitration clause at issue in the case at hand. This is also confirmed by the conference paper of Reymond (CFDIP 1988-89 p. 97), which defendant quotes for its assertion.' 37 The New York Convention, on the other hand, states clearly in Article II(1) that arbitration agreements may cover both contractual and non-contractual relationships. Accordingly, the arbitrability of claims in tort should not cause a problem whenever the Convention is applicable. Likewise, the UNCITRAL Model Law38 and those national laws which are based on it favour the arbitrability of such claims. It is always preferable, of course, for national laws to contain clear provisions on the question, as does English law. 39
20. To conclude, it is a practical fact that the non-arbitrability of tort claims is rare in international arbitration. 40 When such claims arise (e.g. in the context of competition law), they nowadays lead much more to problems involving the application of mandatory rules (when these diverge from the lex causae) rather than arbitrability.
21. Once it has been determined that a claim in tort is capable of settlement by arbitration, the arbitral tribunal's jurisdiction to hear the case will further - and finally - depend on the scope of the arbitration agreement (arbitration clause and terms of reference). [Page44:]
C. Arbitration clause
22. In deciding whether an arbitral tribunal has jurisdiction over tort issues, attention will often focus on the wording of the arbitration clause. Care should be taken to avoid drafting highly 'tailor-made' clauses as they are likely to give rise to endless legal quibbling at a later stage. The closer the wording is to the standard clause recommended by ICC, the easier it will be to predict the line taken by the arbitral tribunal in analyzing the clause.
23. It should be noted that the recommended clause was considered to cover tort liability prior to the present version of the Rules. 41 However, as noted by K.P. Berger, 42 there was an Anglo-American trend in favour of a narrow reading of the phrase 'arising out of the contract' (the phrase 'arising in connection with' used in the 1988 version of the ICC standard clause was broader than this however), which encouraged parties to object to the arbitral tribunal's jurisdiction over claims in tort. 43
24. When the 1998 version of the ICC Rules of Arbitration was drafted, for the sake of legal certainty and to prevent the risk of a narrow interpretation of the former clause, it was considered worthwhile to extend the scope of the clause further by adding the words 'or in connection with'. Thus, to avoid having to engage in subtle and arbitrary interpretation of the scope of each of the phrases 'arising out of' and 'in connection with', 44 it has become common to use both, following ICC's example. Most arbitration institutions nowadays recommend the use of a broad standard clause in connection with their arbitration rules. 45 There is general agreement that the wording 'all disputes arising out of or in connection with the present contract' encompasses tort disputes, and the current standard clause therefore undoubtedly covers tort liability, no matter how tenuous a link it may have with the contractual relationship.
25. Conversely, clauses such as 'occurring as a consequence of the contract' or 'relating directly to the performance of the contract' may be too narrow. In ICC case 7769, where the clause referred to disputes 'that may occur during the present contract or upon the breach thereof', the arbitral tribunal held that it did not have jurisdiction to hear a claim for compensation for damage arising from tortious use of a trademark on the ground that the damage was caused by facts external to and distinct from the contract. Jurisdiction was similarly refused by the arbitral tribunal in ICC case 4491, where the clause covered 'possible disagreements' between the parties. 46
26. Even if the parties have inadvertently drafted a narrow clause, the arbitral tribunal [Page45:] may nonetheless examine torts in the following two situations. An arbitral tribunal may firstly admit a claim in tort on the ground that the misconduct was committed while the contract was being performed and therefore, at least in part, constitutes a breach of the contract. This would satisfy the requirement set by a narrowly worded arbitration agreement ('arising out of the present contract'). 47 Secondly, an arbitral tribunal may extend its jurisdiction, despite a narrowly worded arbitration clause, if the contractual and tort claims are connected. 48 As noted by Reymond, 49 this transcends the criterion of ratione materiae jurisdiction, as the arbitrator's jurisdiction is justified by the mere connection between the claims, regardless of whether or not the arbitration agreement was intended to cover tort liability.
27. Lastly, it is quite conceivable for a clause to be drafted in such a way as expressly to exclude tort disputes from the scope of the arbitration, although we have not come across any such examples. However, one should not overlook the advantage of bringing all claims relating to the same dispute before a single tribunal, and a court or arbitral tribunal may reasonably consider this to have been the parties' intention. 50
D. Terms of Reference
28. Assuming the arbitration clause is broad enough to cover claims in tort, once the dispute has arisen these claims must be made at a sufficiently early stage of the proceedings to qualify for consideration. It is possible for the scope of the proceedings to be more limited than that of the clause. In ICC case 7498, for example, the claims in tort were not examined because they had not been included in the Terms of Reference before these were signed. Alternatively, the scope of the proceedings may be wider than that of the clause, if a clause that is narrower in scope does not give rise to any objections. 51
29. Therefore, any claims in tort and doubts as to arbitrability, jurisdiction or the applicable law should be raised by the time the Terms of Reference are drafted, so as to ensure that the arbitrator provides a reasoned answer to each point. 52 If they are not, the strict provision of Article 19 of the ICC Rules of Arbitration, 53 whose purpose is to encourage parties to be diligent, may prevent the arbitral tribunal from examining the 'true questions'. 54 A pre-1998 illustration of this strictness may be found in the above-mentioned ICC case 7498. Fortunately, the risk of this happening is limited, as Article 19 at the same time gives arbitrators the freedom to accept new [Page46:] claims by way of exception, 55 and in practice arbitrators will usually try to examine all arguments and even all claims.
30. This pragmatic approach, which may nevertheless lead to delaying tactics, has the advantage of bringing together related claims within the same proceedings and preventing an award relating to contractual claims from being contradicted by a judicial decision (or even another arbitral award) relating to the tort claims made by the same parties.
31. Once the arbitral tribunal's jurisdiction over the tort has been established, the applicable law needs then to be determined.
II. Applicable law56
A. Method used for determining the law applicable to the tort
32. The 1998 ICC Rules of Arbitration introduced a fundamental change by allowing arbitrators to determine the applicable law directly, as opposed to applying conflict of laws rules. 57 As a result, their task has become much simpler, but there is less predictability for the parties. Although this liberalization is an attempt to respond to the specific needs of international trade and arbitration, the typical method of resolving international business disputes, 58 there is less justification for abandoning rules of conflict and giving arbitrators almost a free hand to determine the appropriateness of applicable rules when it comes to tort.
33. Unlike the law applicable to the contract, which it is advisable for parties to choose when they enter into their agreement, the law applicable to tort cannot be chosen with similar freedom. Torts are more often than not characterized by their statutory, objective and mandatory aspects. 59 Relations arising from torts cannot be agreed upon in advance, as can contractual relations. To make arrangements over the law applicable to tort would be inconsistent with the mandatory nature of such law. 60[Page47:]
34. It is therefore difficult to imagine that an arbitral tribunal could approve of such a choice by the parties or fail to justify its own choice of the law applicable to tort. Given that rights related to torts are not freely available, the arbitral tribunal should therefore refer to a system of conflicts of laws. The systems that have been used in practice include the rules of conflict specified in the contract (e.g. ICC case 5607), 61 those of the law governing the contract (e.g. ICC case 9999), 62 those in force at the seat of the arbitration, and those in force in the state(s) from which the parties originate. The final award in ICC case 9999 referred to the rules of conflict of the law governing the contract but also took into account those in force at the seat of the arbitration, 63 and there is indeed much to be said for combining rules of conflict (the cumulative method) in the hope that they lead to the same result. 64
35. Many arbitrators today, however, simply do not ask themselves which system of rules of conflict should be referred to, but instead directly choose the rule of conflict they consider to be appropriate, 65 or even avoid a conflict of laws analysis altogether. 66 Ph. Fouchard supports such an approach by arguing that avoiding the use of rules of conflict and allowing arbitrators to choose the most appropriate rules or law(s) does not lead to a lack of determination but enables them to avoid the fearful problems of characterizing the issues in dispute. 67
36. An example of the aforementioned approach is when an arbitrator extends the law governing the contract to the tort for the sole reason that the tort arose in connection with the contractual relations. This approach, albeit appealing, 68 effective and frequent, 69 may nonetheless seem rather simplistic in certain cases. An even more rudimentary approach is to apply a single law to all issues arising in the same case, as was done in case ICC 9617. However, it may be questioned whether the same law should be applied to an entire dispute. 70
37. Alternatives to the law of the contract are more traditionally based on the lex loci delicti, the 'proper law of tort', 71 or other rules designating a centre of gravity on the basis of a set of indicators. Given that in arbitration there is more often than not 'no significant link between the victim of the harm and the country where the injury took place . . . and that mistakes are more likely if arbitrators adopt a general and absolute rule, such as that of the lex loci delicti, than if they determine the applicable law in light of the issues before them', 72 it would seem obvious that arbitrators will prefer to justify their solutions by referring to systems of conflict or directly to rules of conflict that favour the law appropriate to the dispute. [Page48:]
38. However, while admitting that by using localizing factors other than the place of the tort it may be possible to make the law of the tort coincide with the law of the contract and avoid conflicts of characterization, P. Mayer notes that this method of assembling various points of contact sacrifices predictability to flexibility, whereas predictability is important in tort. 73
39. One may conclude by regretting that arbitrators are sometimes rather perfunctory in their reasoning, especially when they extend the law of the contract to the tort. This point is illustrated by ICC cases 6371, 7924, 8447 and 9327. 74 In case 8447, the arbitral tribunal held that, 'French law being applicable to the present dispute (pursuant to Art. 9 lit. k of the Stock Purchase Agreement), [Claimant] has based its claim on Articles 1382 and 1383 of the French Civil Code. It has referred above all to harm done by [Respondent] as a result of failing to comply with a duty to inform . . . which constitutes reticence with intention to deceive during the negotiations leading to the agreement . . .' The partial award in case 9327 is interesting for the brevity with which the arbitral tribunal decided on the application of the lex loci delicti, since it corresponded to 'generally accepted principles' and the parties' had reached agreement on this matter. By contrast, its reasoning when designating the law of the contract was much more elaborate. Although the law of the contract was not 'extended', the law applicable to both the contract and the tort was the same - Belgian law. One may wonder whether the arbitral tribunal's reasoning would have been different if the lex loci delicti had designated a law other than Belgian law.
40. Leaving aside the length of the arbitral tribunal's reasoning and the extent to which it adopts a conflict of laws approach, it is interesting to briefly compare the respective merits of the contract and the place of the tort as connecting factors for the tort in question.
B. Respective merits of the contract and the place of the tort as connecting factors
41. If it is believed that the tort would not have taken place if there had not been a pre-existing contractual relationship between the parties involved, it is not absurd to conclude that the contract has to a certain extent 'localized' the subsequent tort by making it possible. Although the contract continues to reflect the parties' will and their subjectivity, it acquires a certain objectivity as a centre of gravity for the tort. Hence, the law of the contract is extended, as it is most closely connected with the tort (see e.g. ICC case 6320). 75
42. This incidental connection is not necessarily to be preferred to that of the place of the tort or any other territorial or physical connection, which is more stable and predictable for the parties since it is not subject to their will or interpretation. As already mentioned, the lex loci delicti has the undoubted advantage of being objective and predictable, which has long accounted for its success. 76 On the other hand, it could be criticized for being archaic and rigid, and its importance is diminishing in comparative law. It is therefore necessary to make sure that the law qualifying as lex loci delicti, once determined, has a significant link with the situation in question, failing which the law of the country that is more closely connected and common to both tortfeasor and victim should be applied. 77[Page49:]
43. It should be added that there is not necessarily 'one' law for tort, as the applicable law may vary depending on the nature of the tort. 78 In other words, if more than one tort has been alleged in the arbitration proceedings, it is quite conceivable that a different law be applied to each of them. This is the warning given by the dissenting arbitrator in ICC case 9415. In this respect, the fact that recent legislation and institutional rules have adopted the so-called direct method of determining the applicable rules of law has meant that, rather than breaking down the conflict rules in relation to tort, arbitration tends rather to dispense with their services.
44. As we have shown, arbitrators hope that the lex contractus and the lex loci delicti converge79 or, failing this, that the lex contractus may be extended to tort. If their hopes are dashed and the laws of the contract and the tort remain absolutely separate, those with a civil law background will tend to turn to the lex loci delicti while common law arbitrators will no doubt look for the proper law. Both, however, must first respect any mandatory connections, as are to be found in competition law, for instance. They must also be flexible and pragmatic for two reasons: (i) because the tort occurs in the context of a pre-existing contractual relationship and (ii) because the complexity of torts and the fact that parties often come from different legal backgrounds mean that there is no one law that imposes itself as predictable and logical. This leads to a qualified approach, as illustrated in the partial award in case 9415:
If such an alleged tort is connected with the Agreement in a sufficiently close way, [the contractual] law would appear to be in principle applicable . . . If such an alleged tort is not connected with the Agreement in a way which is sufficiently close, then the law of the country in which the tortfeasor acted or the law of the country in which the aggrieved party suffered the damage is to govern the counterclaims based on tort. Consequently, the Arbitral Tribunal reserves its decision on the law applicable to tort on the basis of further and better particulars regarding the counterclaims from Defendant. 80
45. Once the question of the law applicable to the tort has been resolved, 81 the real substantive issues emerge. Here, the aim of the party that has made the claim in tort is often to avoid a statutory limitation period or change the amount of the damages.
C. Statutory limitation periods
46. There is an obvious strategic reason for claiming in tort82 when it is used as a way of avoiding a time bar on contractual claims while claims in tort are still possible. In the contractual sphere, the limitation period usually starts to run from the moment at [Page50:] which the breach of contract occurs, whereas it is the moment at which the damage occurs in the case of tort. 83 In ICC case 9380, the arbitral tribunal clearly identified the strategic intention underlying the claim in tort: 'We suspect that the tort claim was seen as a possible way round the late claim in contract. However we conclude that on any argued basis the tort claim is also time-barred.'
47. In addition to starting at a later date, the limitation period for torts may sometimes quite simply be longer. 84 An interesting example is the award in ICC case 7972, where the arbitral tribunal put an end to discussions by considering that the limitation period for claims in tort should follow that laid down in the contract, on the ground that the tort claims were based on obligations created by the contract. In case 7144, on the other hand, the reason for claiming in tort was not to avoid a limitation period applicable to contracts: under Connecticut law, the limitation period for contracts was six years whereas it was only three years for the tort in question; the claimant therefore had to prove either that the contractual limitation period applied or that a different law governed the tort and the limitation period applicable to it; on the basis of the lex loci delicti, the arbitral tribunal held that Italian law governed the tort and applicable limitation period (six years) and that therefore the claim was not time-barred.
48. Regardless of whether or not a statute of limitations is at issue when claiming in tort, such claims will on the other hand always be marked by particularities regarding the assessment of damages. These particularities may vary considerably depending on the law applicable to the tort.
D. The effect of the law applicable to the tort on the assessment of damages
49. The ultimate aim of parties that raise claims in tort is to avoid limitation clauses in their contracts, or to seek punitive damages when available under the applicable law.
50. A claimant's preference for tort as the basis of its claim may be easily explained by its wish to avoid the limitations upon or exemptions from liability laid down in the contract, or more generally to obtain redress that is not limited to damage foreseeable at the time the contract was made.
51. Some commentators, especially in the English-speaking world, who believe that the contract should not be undermined, consider that a tort action that arises in the [Page51:] context of a pre-existing contractual relationship should be subject to the same limitations as that relationship. Treitel, for instance, points out that a party to a contract should not be allowed to improve its situation simply by opting for a tort action, 85 without regard for the contract, 86 which argues in favour of assessing tort liability in the light of the contractual clauses and defences. 87
52. Legal systems vary greatly in their response to this question, but from a general point of view it is doubtful that tort claims may be waived in advance, when the tort has not yet been committed and therefore no rights relating thereto exist or are available. It does not therefore seem satisfactory to bring future torts within the scope of contractual provisions limiting or removing all liability.
53. In ICC case 7606, such rights existed prior to the clause and were thus available. The arbitral tribunal therefore considered whether the contractual clause providing for an exclusive remedy also covered compensation for prior tortious conduct. It found that the wording of the clause did not cover tort liability, which enabled the claimant to avoid the limit laid down in the contract, provided it could give evidence of harm from tort distinct from that suffered in connection with the contract.
54. An even more specific and appealing reason for claiming in tort is to obtain punitive damages.
55. As a preliminary remark, punitive damages should be distinguished from treble damages. The latter are triple damages intended to encourage the victim of behaviour censured by law (for instance, competition law) to bring legal proceedings aimed at punishing illegal behaviour. Punitive damages, on the other hand, are designed as a penalty for unfair or fraudulent behaviour. 88
56. As arbitrators, unlike judges, have neither general imperium nor the power to order criminal sanctions, they cannot but welcome any widening of their powers. However, as Y. Derains pointed out in 1991, arbitrators are advised to act with particular caution when they are asked to impose a penalty of this kind in a private matter. 89
57. Indeed, there are a number of conditions to be met before punitive damages can be awarded: such damages must be based on a tort; they can be awarded by arbitrators only if they are recognized as being arbitrable; 90 they must come within the scope of the arbitration agreement; and the law applicable to the merits must recognize their existence. Even if these obstacles are overcome, the award of punitive damages may in the end handicap the award if a court at the place of the arbitration or any court called upon for an enforcement order refuses to ratify the award or declare it enforceable on the grounds that it is contrary to the conception of international public policy held by the legal system to which the court belongs.
58. Although punitive damages are most common in the USA, 91 US law does not however appear to provide a foolproof answer to all the legal ambiguities of this hybrid instrument as regards both the grounds upon which it is based and its arbitrability. [Page52:]
59. As far as the basis for punitive damages is concerned, although much has been written on the subject, 92 it is often forgotten that they may be awarded only on grounds of tort, not on contractual grounds, 93 which alone are not sufficient: 94 for punitive damages to be awarded there must at least be a tort in addition to breach of contract. 95
60. Similar hesitation is found with regard to arbitrability. For a long time public policy hindered the arbitrability of treble damages96 and punitive damages. 97 Although it is now accepted that these civil sanctions may be imposed by arbitral tribunals, the parties must have included them within the scope of their arbitration agreement. As far as treble damages are concerned, in the Mitsubishi case, for example, the parties had agreed to refer the question of the validity of the contract in the light of anti-trust law to the arbitral tribunal. With regard to punitive damages, in the Mastruobono case, the court noted that it was the parties' intention to give the arbitrators jurisdiction over the claims for punitive damages. It is precisely questions of this kind concerning the scope of the arbitration agreement that call for the nature of punitive damages to be re-examined. If the arbitration clause is narrowly worded, 98 i.e. limits the arbitral tribunal's jurisdiction to contractual disputes only, this would a priori prevent the tribunal from ordering sanctions relating to torts. It would therefore seem difficult for arbitrators to imagine that they might save themselves the effort of checking their jurisdiction over claims in tort.
61. Other national laws show prudence or even outright hostility towards the institution of punitive damages championed by US law. As clearly stated in ICC case 5030, there cannot be said to be a transnational rule allowing for the award of punitive damages:
In any event, it has not been shown that the law of State X provides for 'exemplary' or punitive damages (they are excluded by French law on which the law of State X is closely based) and they do not form part of the general principles of international contract law. 99[Page53:]
Moreover, it would be of no avail to US law to seek support or confirmation in English law, whose use of punitive damages is much more limited, 100 showing that there is no uniformity on this point amongst common law jurisdictions. After having created punitive damages as a means of private punishment, 101 English law nowadays limits their application, notably as a result of the 1964 House of Lords ruling in Rookes v. Barnard.102 In ICC case 6216, 103 the arbitral tribunal referred to this narrow reading by English law to justify its refusal to award punitive damages under Gambian law.
62. As for French law, it roundly rejects the very concept of punitive damages. The French supreme court consistently holds that civil liability is characterized by the fact that it restores as nearly as possible the balance that has been upset by the damage and puts the victim back in the position in which he or she would have been if the injurious act had not occurred. 104 The principle of full compensation means that the damage alone is repaired, i.e. there is no enrichment of the victim. Unlike criminal liability, 105 there is no idea of retribution, making the penalty proportional to the offence. L. Aynès106 dismisses punitive damages as a sanction peculiar to the common law and defines them as compensation greater than the harm inflicted when there is a need for harsh punishment of certain wrongs. One is tempted to conclude that French courts would criticize such damages, on the ground of either arbitrability or international public policy. 107 To be realistic, one should follow J. Ortscheidt's108 view that if a French court sets aside or refuses to enforce an award, this is not a condemnation of the punishment itself but of the excessive nature of the amount awarded by the arbitrator given the requirements of French international public policy.
63. It is worth recalling the note of caution sounded at the beginning of the present section. Normally, it is not necessary to have recourse to punitive damages for the sake of deterrence. Besides, the freedom enjoyed by arbitrators when assessing the harm is reason enough for them not to jeopardize the future of their awards. This was the reasoning of the arbitral tribunal in the final award in ICC case 7144:
Connecticut law allows punitive damages to be awarded. We understand both the policy of awarding punitive damages to discourage conduct contrary to the public interest, and the objection to them in many legal systems on the ground that it is not the public that receive the damages but the other party in excess of actual losses.
We find that we can assess compensation to allow fully for the losses to [Claimant] and ensure wrongful conduct is not encouraged, without an award of punitive damages. [Page54:]
64. Although most of the examples of the refusal of enforcement orders that have been cited by scholars concern foreign judgments rather than awards, 109 mention should also be made of ICC award 5946 rendered in Switzerland in which an arbitrator refused to award punitive damages on account of the prohibition inherited from Swiss law. 110
65. As a final remark, it should be noted that, whatever the tort and the law applicable to it, the aggressive tactic of requesting punitive damages to impress the respondent rarely succeeds. 111 This is to be welcomed, as the dangers arising from awarding such damages outweigh the benefits.
Conclusion
66. We are aware that many experienced practitioners may consider the above comments and viewpoints too demanding or restrictive. We believe, however, that the credibility of arbitration calls for an ongoing and increasing effort to reconcile the mandatory nature of certain rules, the predictability of the legal solutions for the parties, and party autonomy in international matters.
67. The method used by arbitrators to settle claims in tort is not always sufficiently explicit. There are signs of unease in some of the awards relating to tort, which makes them difficult to exploit. It is to be hoped that the publication of extracts from the most relevant awards will lead to a greater awareness of and familiarity with the issues inherent to tort. It will then be up to the parties and the arbitrators to decide on a case-by-case basis which of these issues deserve to be raised and reasoned through.
68. This may in due course lead to a relatively standard method of dealing with claims in tort, taking into account both the consensual context of arbitration and the prevalence of public policy in the field of tort. That is assuredly the price to be paid for tort to cease being a curiosity and a strategic arm in arbitration and for its use to become limited to the necessary protection of economic rights in international commercial relations, whose complexity now goes beyond purely contractual matters.
1 e.g. ICC case 7692. Here, the respondents in the arbitration proceedings filed a lawsuit on grounds of tort. The claimants thereupon asked the arbitrators to issue a negative declaratory judgment establishing that the respondent had no pre-existing right to bring such an action and entered a claim in tort, alleging that the respondents had committed a tort by filing a suit in the Texas courts first instead of resorting immediately to arbitration. In its final award, the arbitral tribunal recognized 'that the filing of a lawsuit can constitute a tort under Swiss law but only if it is malicious or against good faith'. Swiss law, which was applicable to the two contracts in the case, considers that it is a question of Swiss substantive law whether or not a party may seek a negative declaratory judgment relating to claims subject to Swiss law.
2 But see the final award in ICC case 6519. Here, the harm was necessarily tortious as the main contract had not become effective, yet there was a valid arbitration agreement. cf. Collection of ICC Arbitral Awards 1991-1995, commented and indexed by J.J. Arnaldez, Y. Derains & D. Hascher (Kluwer/ICC Publishing, 1997) [hereinafter Collection 1991-1995] at 420, [1991] J.D.I. 1065.
3 In a recent ICC case, the list of grounds given in support of a claim for additional monetary damages reads as follows: 'alleged intentional misrepresentation, negligent misrepresentation, violation of the covenant of good faith and fair dealing, and violation of the . . . California Civil Code § 1812.200, et seq. against the . . . defendants and for intentional interference with contractual relations, negligent interference with contractual relations, conspiracy to intentionally interfere with contractual relations'.
4 Some of these torts may be characterized differently depending on the law applicable to them; see paras. 7-16, below.
5 See e.g. ICC cases 1990 and 5477, C. Reymond, 'Conflit de lois en matière de responsabilité délictuelle devant l'arbitre international', Travaux du Comité français de droit international privé, 1988-89 (Paris: CNRS, 1991) 97 at 98-99.
6 See e.g. ICC case 5477, [1988] J.D.I. 1204, Collection of ICC Arbitral Awards 1986-1990, commented and indexed by S. Jarvin, Y. Derains & J.-J. Arnaldez (Kluwer/ICC Publishing, 1994) at 358ff.
7 See e.g. ICC case 5607, hereinafter at 55.
8 See e.g. ICC case 6216, hereinafter at 58.
9 See e.g. ICC cases 6371, 7924, 9999, hereinafter respectively at 60, 69, 88.
10 See e.g. ICC cases 6618, 9327, hereinafter respectively at 63, 71.
11 See e.g. ICC case 7144, hereinafter at 68.
12 See e.g. ICC case 9327, hereinafter at 71.
13 ibid.
14 See e.g. ICC case 9517, hereinafter at 87.
15 See e.g. ICC case 6371, hereinafter at 60.
16 Under Belgian law, for instance, this corresponds to a pre-contractual duty to inform.
17 See e.g. ICC case 7144, hereinafter at 68.
18 In the unpublished final award in ICC case 10275, for example, no wrong was found but unfair competition was discussed without any mention of its nature and foundation.
19 Sometimes, however, arbitrators have considered themselves deprived of jurisdiction by the wording of the arbitration agreement, e.g. ICC cases 6309, Collection 1991-1995 at 401, [1991] J.D.I. 1046; 8867.
20 In the words of Lord Mustill: 'In deciding whether a claim in tort lies within the arbitrator's jurisdiction, the enquiry takes place in two stages. The first is to identify the nature of the dispute, and the second is to decide whether the tortious claim has a sufficiently close connection with claims under the contract to bring it within the scope of the arbitration clause.' M.J. Mustill & S.C. Boyd, Commercial Arbitration 2d ed. (London and Edinburgh: Butterworths, 1989) at 117 [emphasis added].
21 See C. Reymond supra note 5 at 100. In any event, it is to be hoped that once the questions of jurisdiction and the law applicable to the tort have been settled, the law of the tort (if different from that of the contract) does not categorize the facts differently from the law of the contract. As far as we aware, there is no straightforward solution to such a conflict in arbitration, nor have we found any examples, as arbitrators no doubt take care to avoid such conflicts.
22 See hereinafter at 55.
23 According to French case law, the creditor in a contractual relationship cannot pursue the debtor on grounds of tort, even if it is in the creditor's interest to do so; cf. Cass civ. 1re, 4 November 1992, Bull. civ. 1992.I.No. 276; Cass. civ. 3e, 9 June 1993, Bull. civ. 1993.III.No. 204.
24 This principle was applied as part of French law in ICC case 6948.
25 There is a noteworthy exception in French law when the failure to perform a contractual obligation constitutes a criminal offence. As noted by L. Leturmy, 'La faute délictuelle du contractant' [1998] Revue trimestrielle de droit civil 849, the criminal division of the French supreme court traditionally holds that when penal sanctions apply to the failure to perform a contractual obligation, the civil action engaged in the criminal court in conjunction with the criminal prosecution must be judged according to the principles governing tortious liability, without any need to take into consideration the contractual nature of the misconduct in question (see Cass. crim., 26 November 1964, Gaz. Pal. 1965.I.312). This case law, which is peculiar to the criminal division, is widely criticized by scholars. It goes against the principle that the two kinds of actions may not be combined: not only does it allow the victim to choose between contractual liability, by bringing a civil action, and tortious liability, by bringing a criminal action, but also the fact of bringing a civil action in a criminal court leads to the application of rules relating to tort where contractual liability is normally applicable. As a result, the balance of the contract is upset, as rules peculiar to contractual liability, such as the foreseeability of damage and limitation of liability are disregarded. Hence, if a party to an arbitration were concurrently to introduce an action in the French criminal courts, there would be a real risk of contradiction between the court's reasoning on the basis of tort and the contractual reasoning of the arbitral tribunal. It should be noted that international arbitrators are not required to stay arbitral proceedings when concurrent criminal proceedings are initiated, as this requirement does not form part of international public policy (on this point see the thesis of J.B Racine, L'arbitrage commercial international et l'ordre public (Paris: LGDJ, 1999) at 92ff).
26 See L. Aynès, Obligations (Paris: Cujas, 1998) at para. 270.
27 A common law example of the question of concurrent actions and the requirement of separate harm is to be found in ICC case 7606.
28 Under French law, for example, if fraud was committed when a contract was made, the right to bring an action for cancellation of the contract, which is a contractual remedy, does not prevent a litigant from seeking redress on grounds of tort too.
29 Paris, 25 November 1997, Société VRV v. Pharmachim (Annot. G. Bolard, [1998] Rev. arb. 684): 'It is consistently held that due process requires that each party be allowed to argue its case in full awareness of the matter at issue and that an arbitrator's decision be based solely on the points which have been openly discussed . . . The arbitrators have violated the principle of due process, incumbent upon them, by taking it upon themselves to change the legal basis of the claim for damages made by a party on the basis of the terms of the contract and instead decide the merits and grant the claim by referring to the rules of tort liability, which had not been invoked by the other party, without warning the parties or inviting them to express theirs views.' [emphasis added]
30 US lawyers use this term sometimes to mean the powers of the arbitrator and at other times with the narrower meaning it has, for example, in French law, namely that disputes are capable of being settled by arbitration and that the parties are entitled to resort to this method of dispute resolution (see E. Gaillard & J. Savage, eds., Fouchard, Gaillard, Goldman on International Commercial Arbitration (The Hague: Kluwer Law International, 1999) at para. 532). The term is used here with the second of these two meanings.
31 See infra. See also K.P. Berger, International Economic Arbitration (The Hague: Kluwer, 1993) at 189ff.
32 P. Mayer, 'Les limites de la séparabilité de la clause compromissoire' [1998] Rev. arb. 359 at 367-368 (especially the reference to Article V(1)(a) of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards ('New York Convention')).
33 As mentioned in paragraph 1, the mere fact that rights are part of public policy does not prevent them from being referred to arbitration. Most modern legal systems have happily abandoned the belief that public policy and arbitrability are incompatible. Although a reflection of greater trust in arbitrators, courts nonetheless have the authority to check that public policy has been upheld. On the relationship between public policy laws and arbitration, see the enlightening thesis of C. Seraglini, Lois de police et justice arbitrale internationale (Paris: Dalloz, 2001) at paras. 2, 157, 328.
34 If the law applicable to tort is not the same as the law applicable to the contract, at least three laws will be involved.
35 cf. ICC Rules of Arbitration, Art. 35: 'In all matters not expressly provided for in these Rules, the Court and the Arbitral Tribunal shall act in the spirit of these Rules and shall make every effort to ensure that the Award is enforceable at law.' To ensure that an award has every chance of being performed, arbitral tribunals should ask themselves whether there are jurisdictions in which the validity or circulation of the award is likely to be undermined for reasons of non-arbitrability.
36 For example, the non-arbitrability of rights relating to tort may be limited to future disputes, i.e. situations in which such rights are unavailable and may not be the subject of arbitration agreements prior to the occurrence of the dispute. Once the dispute has arisen, however, arbitrability should be the general rule and such rights may accordingly be the subject of submission agreements. cf. ICC case 5921, where the sole arbitrator stated in his partial award that it was irrelevant to determine whether the arbitration clause may cover the consequences of tortious liability, because there was a subsequent submission agreement covering the contractual and tortious issues that already existed on the date it was signed.
37 French law may for instance be consulted as the law applicable to the underlying relationship, i.e. to determine whether tort liability is arbitrable. To decide on arbitrability in general, reference should be made to the free availability of rights resulting a contrario from Article 2059 of the French Civil Code. Moreover, it would be helpful for French law, like Swiss law, to specify that the rights available are 'pecuniary' rights. Legal thinking does not seem to see any difficulty in settling tort issues through arbitration. According to Fouchard, Gaillard, Goldman, supra note 30 at para. 524, for instance, '[t]here is no doubt that disputes of a tortious nature are arbitrable'. Similarly, when discussing the abuse of a dominant position, Goldman said clearly that it is not the tortious nature of a wrong that should prevent it from being referred to arbitration (see discussions following C. Reymond, supra note 5 at 110). See also J.-B. Racine, supra note 25 at para. 88. It may therefore be concluded that only in domestic matters does there remain any doubt as to the arbitrability of tort under French law. If, however, French law is consulted as the law applicable to the arbitration agreement, i.e. to check that the agreement is valid/lawful, it should be noted that the former Article 2061 of the French Civil Code ('Arbitration clauses are null and void unless the law provides otherwise.') was neutralized by case law that considered it inapplicable in international matters (Cass. civ. 1re, 5 January 1999, Bull. civ. 1999.I.No.2). It should also be recalled that the praetorian principle affirming the validity of international arbitration clauses is a substantive rule of (French) international arbitration law, distinct from any conflict of laws analysis or any reference to national law. As noted by Ph. Fouchard in his commentary of the aforementioned judgment of 5 January 1999 ([1999] Rev. arb. 260), this principle is not based on any French legal provision, nor did the French supreme court refer to Article II of the New York Convention, despite the fact that France withdrew its reservation limiting the application of the Convention to commercial relations in 1989. Ph. Fouchard adds that, although doubtless of national origin, this substantive rule affirming validity regardless of whether or not the relationship is of a commercial nature, is applicable - at least by French courts - to any international arbitration clause. The validity of the clause is dependent on a sole condition - that the arbitration clause is consistent with international public policy (within the meaning of French law). This condition is certainly met as far as tort is concerned. It should be pointed out that the new Article 2061 ('Subject to special legal provisions, arbitration clauses are valid in contracts entered into for professional purposes.') appears neither to have been drafted for the international sphere nor to cast doubt on the principles prevailing in that sphere.
38 Model Law on International Commercial Arbitration adopted on 21 June 1985 by the United Nations Commission on International Trade Law. It is indicated in a footnote to the Model Law that the word 'commercial' in the expression 'international commercial arbitration' should be interpreted broadly to mean matters arising from any commercial relation, be it contractual or non-contractual. See Article 7(1) of the Model Law and the discussions published in H.M. Holtzmann & J.E. Neuhauss, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (Deventer: Kluwer, 1989) at 70-95.
39 See e.g. section 6(1) of the 1996 English Arbitration Act provides that the disputes submitted to arbitration may be contractual or otherwise. See also the German law of 22 December 1997 (§ 1029).
40 In an arbitral award rendered under the auspices of an institution other than ICC in a case in which the present author was involved, the arbitral tribunal declined jurisdiction because the dispute related to natural resources and, as such, was deemed not to be arbitrable under the law of the country in question.
41 See e.g. ICC case 9517, hereinafter at 87ff. According to US federal appeal court case law, 'the clause recommended by the ICC should be understood to cover a wide range of problems submitted to arbitration . . . It embraces every dispute between the parties having a significant relationship to the contract regardless of the label attached to the dispute', J.J. Ryan & Sons, Inc. v. Rhône Poulenc Textile SA, 863 F 2d 315 (4th Cir. 1988). The Court of Appeals thereby reversed the Federal District Court which had held that the clause should be 'somewhat narrowly read' and excluded one of the nine categories of disputes between the parties (case cited by S.R. Bond, 'How to Draft An Arbitration Clause (Revisited)', (1990) 1:2 ICC ICArb. Bull. 14 at 17). See also Tennesee Imports v. Pier Paulo Filippi and Prix Italia SRL (US District Court for the Middle District of Tennessee, 19 August 1990, (1990) International Arbitration Report Vol. 5, p. 9.Likewise, French case law traditionally favours a broad interpretation of arbitration clauses: Cass. com., 11 October 1954, referred to by the advocate-general in Paris Court of Appeal, 11 December 1981, D.1982.387, where the clause provided that arbitration be used for all disputes 'resulting from' (découlant de) the agreement, (both cases referred to in W.L. Craig, W.W. Park & J. Paulsson, International Chamber of Commerce Arbitration, 3d ed. (ICC Publishing/Oceania, 2000) at 65). See also the final award in ICC case 7924, hereinafter at 69ff.
42 supra note 31 at 124
43 This trend was reflected both in American court decisions (e.g. Michele Amoruso e Figli v. Fisheries Development Corp., 499 F.Supp. 1074, 180 (SDNY 1980), in which it was held that an agreement covering only disputes 'arising out of the agreement' did not cover disputes relating to the fraudulent inducement of the main contract) and arbitral awards rendered in Europe (e.g. in proceedings seated in Belgium, a sole arbitrator held that an arbitration agreement of the kind 'arising out of the contract' did not cover claims in tort; see ICC case 6309, [1991] J.D.I. 1046 (Annot. J.-J. Arnaldez))
44 This change is in line with the findings of an ICC study confirming that a dispute 'arising out of this contract' is definitely 'in connection with the contract', but that conversely a dispute 'in connection with the contract' does not necessarily 'arise' out of the contract, because the phrase 'in connection with' has a wider meaning. See Working Group on the ICC Standard Arbitration Clause, Final Report of 3 March 1992, ICC Doc. No. 420/318 Rev. at 16.
45 e.g. 'any controversy or claim arising out of or relating to this contract' (International Arbitration Rules of the American Arbitration Association (AAA)), 'any disputes relating to or arising out of this agreement' (International Centre for Settlement of Investment Disputes (ICSID)), 'any dispute arising out of or in connection with' (London Court of International Arbitration (LCIA)), 'all disputes arising out of or in connection with' (Zurich Chamber of Commerce). It is therefore logical that UNCITRAL should recommend the use of a similar phrase in the model arbitration clause included in its Arbitration Rules: 'any dispute, controversy or claim arising out of or relating to'.
46 Quoted by K.P. Berger, supra note 31 at 124.
47 Such reasoning is clearly more acceptable in those legal systems that allow contract and tort claims to be made simultaneously (see supra). As pointed out by K.P. Berger (supra note 31 at 124-125), such an approach is necessary to prevent the claimant from evading the arbitration agreement by simply altering the legal basis of the claim while the facts underlying the claim remain the same. Illustrations of this first means of extending jurisdiction are found in both arbitral awards (ICC cases 5779, quoted in the commentary of ICC case 5477, [1988] J.D.I. 1204 (Annot. Aguilar-Alvarez); 6309 [1991] J.D.I. 1046 at pp. 1049-50 (quoting the awards in cases 5477 and 5779); and 6519, [1991] J.D.I. 1065 (Annot. Y. Derains)) and Anglo-American judicial case law (Lonrho Ltd v. Shell Petroleum Co., Times, 1 February 1978, 1979 IV Y.B. Comm. Arb. 320, see W.L. Craig, W.W. Park & J. Paulsson supra note 41 at 109, M.J. Mustill & S.C. Boyd, supra note 20 at 117; Re Polemis and Furness, Withby & Co. [1921] 3 KB 560 (shipper's liability for damage caused to ship through mishandling by a docker for whom shipper was answerable), see M.J. Mustill & S.C. Boyd supra note 20 at 117, Fouchard, Gaillard, Goldman supra note 30 at para. 524, C. Reymond supra note 5 at 98; Difwind Farms Ltd & Viking Windfarms Ltd v. Ventilatoren Stork Hengelo BV, No. CV 88-5038 MRP (US District Court, Central District of California, 23 January 1989) (1990) XV Y.B. Comm. Arb. 611, see Fouchard, Gaillard, Goldman supra note 30 at para. 524, note 240)
48 See especially aforementioned final award in ICC case 5477, [1988] J.D.I. 1204.
49 supra note 5 at 101.
50 See especially M.J. Mustill & S.C. Boyd supra note 20 at 117: courts will often make the prima facie assumption that the parties intended related contractual and tort disputes to be settled by a single arbitral tribunal.
51 In this regard, see Article 33 of the ICC Rules of Arbitration: 'A party which proceeds with the arbitration without raising its objection to a failure to comply with any provision of these Rules, or of any other rules applicable to the proceedings, any direction given by the Arbitral Tribunal, or any requirement under the arbitration agreement relating to the constitution of the Arbitral Tribunal, or to the conduct of the proceedings, shall be deemed to have waived its right to object.'
52 We subscribe to the view expressed by Ph. Fouchard (see C. Reymond supra note 5 at 115) that when an issue of tort linked to the cancellation of the contract or pre-contractual liability is raised by a party during proceedings, after the dispute has been defined in the Terms of Reference as a contract and contractual liability alone, this is fraught with problems.
53 ICC Rules of Arbitration, Art. 19: 'After the Terms of Reference have been signed or approved by the Court, no party shall make new claims or counterclaims which fall outside the limits of the Terms of Reference . . .'
54 Expression used by C. Reymond, supra note 5 at 116.
55 ICC Rules of Arbitration, Art. 19, in fine: 'unless it has been authorized to do so by the Arbitral Tribunal, which shall consider the nature of such new claims or counterclaims, the stage of the arbitration and other relevant circumstances'. For a more detailed examination of this question in connection with the 1998 ICC Rules of Arbitration, see, in particular, M.E. Schneider, 'The Terms of Reference', in The New 1998 ICC Rules of Arbitration (Paris: ICC Publishing, 1997 (ICC Publication No. 586, Special Supplement ICC ICArb. Bull.) 26.
56 Following the innovation made in French law, the latest version of the ICC Rules of Arbitration uses the expression 'rules of law' (see Article 17) instead of the previous 'applicable law'. However, for the sake of convenience and on account of the particularities of tortious liability, we shall use the generic expression 'applicable law'. It may be noted that general principles of international commercial law and lex mercatoria have no counterpart in tort. As pointed out by P. Lagarde (see C. Reymond supra note 5 at 116-17), to identify substantive rules of tort as universal principles of liability in international commercial arbitration 'would be very, very dangerous . . . because one is already in the field of unlawfulness and if one contrives to have a tailor-made lex delictoria . . . (see C. Reymond, supra note 5 at 116-117). For the same reasons, the use of good faith as a general principle of law on which to base tortious liability is also to be discouraged (on this question see P. Mayer, 'Le principe de bonne foi devant les arbitres du commerce international', Etudes de droit international en l'honneur de Pierre Lalive (Basle: Helbing & Lichtenhahn, 1993) 543 at 545, 548 and the comments on Cameroun v. Klöckner). Hence, arbitrators have no real alternative but to select a national law and its substantive rules to govern tortious liability.
57 Article 17: 'In the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate.'
58 There is traditionally a greater degree of party autonomy in international contracts when they are subject to arbitration, as shown by the recognition of contracts without law in international arbitration.
59 Some legal systems have nonetheless included in their conflict of laws rules relating to tort, as an exception to the lex loci delicti rule, the extension of the law governing the pre-existing relationship and party autonomy. See interim award in ICC case 9415, para. 154, hereinafter at 80.
60 See also Ph. Fouchard (in C. Reymond supra note 5 at 114-15) : 'I leave aside policing laws, which should in any event be respected - but with regard to extra-contractual liability, it may be asked whether the parties are free to choose the law applicable to the tort.' We would go further and insist that arbitrators have a duty to enquire whether parties have such freedom, for the mere fact that a dispute is arbitrable does not make the law applicable to tort subject to the will of the parties, regardless of whether the dispute already exists or not.
61 See hereinafter at 55. Here again, the capacity of the parties to freely decide on the rules of conflict governing torts may be questioned. Moreover, had the parties included a provision relating to rules of conflict, it is quite simply doubtful that they would have thought of the possibility of tortious liability.
62 See hereinafter at 88.
63 See also the interim award in case 9517 (hereinafter at 87) where the law at the place of the arbitration was used, not for its rules of conflict, but more directly and radically as the law applicable to the tort, although the arbitrators backed up their solution by pointing to the links with the contract. However, it is difficult to see what links there may have been between the place of the arbitration and the tort.
64 e.g. ICC cases 6618, 9999, see hereinafter respectively at 63 and 88.
65 i.e. without justifying the choice of the system from which this rule is taken, for example by saying that the lex loci delicti is appropriate but without indicating whether the rule is drawn from the French, Austrian or another system.
66 By contrast, the interim award in ICC case 9415 goes into the question in depth, see hereinafter at 74.
67 See C.Reymond supra note 5 at 114.
68 For instance, it avoids possible conflicts of characterization between the law of the contract and that of the tort.
69 e.g. cases 6618 and 9517 (the reasoning is scarcely more complex in the second case), see hereinafter at respectively 63 and 87.
70 See Ph. Fouchard (in C. Reymond, supra note 5 at 114-15), who asked whether it is right to allow the parties to choose the law applicable to the merits of the dispute, which goes much further than the law applicable to the contract. Adopting a rather liberal position, C. Reymond replied that if the parties have agreed that the dispute will be examined according to the law of country X, which they are more likely to have done in an arbitration agreement made after the dispute has arisen than in an arbitration clause or in the terms of reference, then the arbitral tribunal is bound by the parties' choice (ibid.).
71 The proper law is the law with which the situation is most closely and substantially connected. It was Morris' seminal article 'The Proper Law of the Tort', (1951) 64 Harvard Law Review 881, which caused doubt to be cast on the 'undisputed rule of the lex loci delicti' (expression used by C. Reymond who describes the article as 'explosive' (supra note 5 at 97)). It led to the famous Babcock v. Jackson judgment of 9 May 1963 (191 N.E. 2d 279), which established this approach as the prevailing method in Anglo-American jurisdictions (see especially Restatement (Second) of Conflict of Laws, USA).
72 C. Reymond supra note 5 à la p. 104.
73 See P. Mayer, Droit international privé, 7th ed. (Paris: Montchrestien, 2001) at para. 679.
74 The awards in which the arbitrators are more detailed and disciplined in their reasoning, such as cases 5607, 7144, 9415 and 9999, are therefore all the more valuable as 'precedents'.
75 This case is referred to in paragraph 160 of the partial award in case 9415, hereinafter at 80-81. More simply, the law of the contract and the law of the tort will often coincide as the connecting factor under the proper law method is practically identical in both cases. For instance, according to the US Restatement (Second) of Conflict of Laws, the connecting factor for contracts is the 'most significant relationship to the transaction and the parties' and for torts the 'most significant relationship to the occurrence'. Thus, when tort is the subject of arbitration, the proper law of the contract and the proper law of the tort will usually and not surprisingly be the same law, as the contract acts somewhat mechanically as the centre of gravity for the tort.
76 See P. Mayer supra note 77.
77 cf. partial award in case 9415 (especially paras. 147ff).
78 Such breakdown of the rules of conflict relating to tort is further proof of the obsolescence of the lex loci delicti. C. Reymond, supra note 5 at 105, notes that the Swiss private international law statute contiains at least six rules of conflict relating to tort. See P. Bourel, Les conflits de lois en matière d'obligations extracontractuelles (Paris: LGDJ, 1961) and, by the same author, Du rattachement de quelques délits spéciaux, Collected courses of The Hague Academy of International Law, vol. 224, 1990, 279
79 e.g. case 9327, see hereinafter at 71.
80 See hereinafter at 81.
81 We would reiterate that this question is unfortunately often skirted.
82 It should be noted however that certain statutes of limitations do not depend on the contractual or tortious nature of the action. This is true of legal malpractice actions in some US States and actions relating to liability for defective products based on Articles 1386-1 et seq. of the French Civil Code.
83 This is the case in French law, where the starting point for liability actions is the date on which the victim may act, i.e. becomes aware of the circumstances entitling him or her to act (cf. L. Aynès supra note 26 at 1087), which is consistent with the principle actioni non natae non currit praescriptio (an action that has not yet arisen cannot be barred); e.g. Cass. soc., 18 December 1991, Bull. civ. V.No. 598; J.C.P., 1992.IV.635: 'The limitation period for an action in liability starts to run when the harm occurred or on the date on which it is revealed to the victim if the latter establishes that it was previously unaware of the harm.' Courts have even revived the old rule contra non valentem agere non currit praescriptio (time bars cannot apply to persons who have been prevented from acting) in order to delay the starting point of a limitation period when a case of force majeure prevents the creditor from acting. See L. Aynès supra note 26 at 1095.
84 For example, under the ordinary rules of French law, the contractual limitation period is much longer (30 years as opposed to 10 for extra-contractual civil liability (Civil Code, Art. 2270-1); e.g. Cass. civ. 3e, 6 February 1969, B.III.No.109. This period is reduced to ten years however for obligations created between merchants (Commercial Code, Art. 189 bis). There is therefore more of a reason for claiming in tort when the ordinary contractual limitation period does not apply. For example, to avoid the ten-year limitation period of Articles 1792 and 2270 of the Civil Code, there have been several decisions admitting tortious liability based on fraudulent behaviour independent of the contract (e.g. Cass. civ. 3e, 23 July 1986, Bull. civ. 1986.III.No.219; 18 December 1972, D.1973.272). When an architect or a contractor has knowingly concealed defects in the work done, so as to prevent the owner from discovering them within ten years, the advantage of the limitation period applicable to tortious liability is useful and justified. Likewise, when there has been deceit during the formation of the contract, the right to bring an action for annulment (which is limited to five years) does not exclude a tort action which is subject to a ten-year limitation period. See L. Aynès, supra note 26 at 880.
85 G.H. Treitel, 'Bills of lading and third parties' [1986] Lloyd's Maritime and Commercial Law Quarterly 294 at 304 : '[A] person who is a party to the contract of carriage cannot improve his position by disregarding the contract and suing in tort.'
86 Although this would appear to be allowed by the possibility of pleading on the two grounds (simultaneously or alternatively).
87 Maybe these are again considerations and difficulties specific to the countries where it is possible to choose between the two kinds of liability, insofar as the contractual debtor must be protected against possible surprises. It is precisely by forbidding simultaneous actions on both grounds that France provides such protection. The French solution is clearly more orthodox in this respect because the fact that an action has been defined as tortious excludes the rules peculiar to contractual liability, such as the limitation to foreseeable harm and the effect of limitation clauses.
88 See J.-B. Racine, supra note 25 at 93.
89 Y. Derains, 'Intérêts moratoires, dommages-intérêts compensatoires et dommages punitifs devant l'arbitre' in Etudes offertes à Pierre Bellet (Paris: Litec, 1991) 101 at 121.
90 In civil law systems, for instance, civil sanctions are commonly distinguished from criminal sanctions by the fact that public policy prevents them from exceeding complete compensation. The person who has caused injury must provide compensation for the entire damage done but no more than this. As the existence and/or recognition of sanctions exceeding full compensation are expressly and consistently denied, this leads quite naturally to their non-arbitrability.
91 According to S. Carval (in La responsabilité civile dans sa fonction de peine privée (Paris: LGDJ, 1995) at para. 43, punitive damages date from an English judgment of 1763 (Huckle v. Money, 2 Wils. K.B. 205), and were first referred to in a US judgment in 1784 (Gennay v. Norris, 1 S.C. 3, 1 Bay 6).
92 See especially the recent contributions by C. Jauffret-Spinosi and J. Ortscheidt in the proceedings of the conference 'Faut-il moraliser le droit français de la réparation du dommage?', Petites Affiches, 20 November 2002.
93 Should arbitrators ignore this distinction, they would not be the first to do so, as shown by the large number of judgments noted by Williston (Contracts, 3d ed., Jaeger, 1968 at §§ 1340, 1341) in which courts have awarded punitive damages in contractual actions without even going to the trouble of subsuming them within tortious actions (quoted by G. Gilmore, The Death of Contract (Ohio State University Press, 1974) at 83).
94 Hence, ordering punitive damages on purely contractual grounds, even when bad faith is involved, should be considered improper and disapproved of. See G.W. Jones: 'The allowance of punitive damages is an extreme measure and is permitted only in cases of substantial malice, fraud, oppressive and wilful conduct' (G.W. Jones, 'Punitive Damages in Arbitration in the USA' [1986] Int'l. Bus. Law 188, quoted by J.B. Racine, supra note 25 at 93)
95 This traditional analysis has the support of G. Gilmore, supra note 97 at 14. Paraphrasing Holmes, Gilmore asserts that 'money damages for breach of contract were to be "compensatory", never punitive; the contract-breaker's motivation makes no legal difference whatever'.
96 The Supreme Court overturned American Safety Equipment Corp. v. Mc Guire & Co. de 1968 (391 F. 2d 821, 826 (1968)) with regard to international arbitration (a solution subsequently extended to domestic arbitration) through its landmark Mitsubushi Motors Corp. v. Soler Chrysler-Plymouth judgment of 1985 (473 US 614: 'The treble-damages provision wielded by the private litigant is a chief tool in the antitrust enforcement scheme . . . The importance of the private damages remedy, however, does not compel the conclusion that it may not be sought outside an American court. Notwithstanding its important incidental policing function, the treble-damages cause of action . . . seeks primarily to enable an injured competitor to gain compensation for that injury.' By deciding that treble damages were of a civil rather than repressive nature, 'the emphasis is placed on the interest the individual has in obtaining compensation for the harm suffered, although the public interest in the protection of competition is also, but indirectly, favoured. Identifying treble damages as part of private law is undoubtedly the main factor allowing the dispute in question to be considered arbitrable', M.A. Renold, 'Arbitrage international et droit anti-trust : l'arrêt Mitsubishi v. Soler de la Cour suprême des Etats-Unis' [1986] Rev. droit suisse 550 (quoted by J.-B. Racine, supra note 25 at 102).
97 It is entirely logical that punitive damages should have enjoyed the same favor arbitrandum as treble damages. In its Mastruobono v. Shearson Hutton Inc. judgment of 6 March 1995 ([1995] Rev. arb. 295 (Annot. L.A. Niddam)) - confirmed by Layne v. Stratton Oakmont Inc., 30 December 1996, quoted by J.-B. Racine, supra note 25 at 94 -, the Supreme Court held that an arbitral tribunal had the power to order payment of punitive damages, as it did with treble damages. Hence, as noted by J.-B. Racine, 'the power to award punitive damages is consistent with the demands of American public policy' and it may therefore be considered that this remedy should no longer raise any problems of arbitrability in US law. The arbitrability of punitive and treble damages limits the role of state courts to reviewing awards to check their compliance with public policy ('i.e. the arbitral tribunal's obligation to apply anti-trust law irrespective of the law applicable to the merits', J.-B. Racine, supra note 25 at 102) at that stage.
98 See supra.
99 Collection 1991-1995 at 475, esp. 483. See also J. Ortscheidt, La réparation du dommage dans l'arbitrage commercial international (Paris: Dalloz, 2001) at para. 606. See especially ICC case 5030 to which reference is made in this connection.
100 E. Errante sheds interesting light on the different perceptions of punitive damages in English and US law: 'The English courts will award punitive damages in a more limited range of cases than will American courts. In the US, courts will award punitive damages if, in their discretion, the conduct of the defendant is such as to deserve punishment. The English courts, on the other hand, limit awards of punitive damages to cases where such damages are authorized by statute, where there has been improper action by employees of the State, or where the defendant has acted with the intent to make a profit from his wrongful conduct. An example of the latter situation is a case where a book publisher intentionally publishes a book containing defamatory statements about the plaintiff in order to increase sales.' E. Errante, The Anglo-American Law of Contracts, Paris, LGDJ-Jupiter, 1995 at para. 8.2.
101 See supra Huckle v. Money, 1763.
102 Rookes v. Barnard, (1964) A.C. 1129, cited by J. Ortscheidt, supra note 103 at para. 605. J. Ortscheidt (ibid. at para. 674) furthermore cites two examples of recognition of foreign judgments which tend to show that an award granting punitive damages could encounter problems in the United Kingdom at the review or enforcement order stage. Firstly, the fear of having to recognize US decisions ordering the payment of huge punitive damages thwarted a draft treaty with the USA in the 1970s.Secondly, s. 5(1) of the 1980 Protection of Trading Interest Act allows the recognition and enforcement of foreign judgments awarding multiple damages to be refused. Although these two examples do not directly concern punitive damages in arbitral awards, it may be assumed that the unease observed in court decisions may very well extend to arbitral awards. Moreover, the fact that English courts are very parsimonious in their handling of punitive damages confirms their assumed aversion to such damages. Hence, as J. Ortscheidt points out, ibid. at para. 675, even though an award granting treble or punitive damages should not in itself offend the basic conceptions of the English legal system, the exaggerated nature of the amount awarded could certainly lead English courts to a different conclusion. See however the contributions of C. Jauffret-Spinosi and J. Ortscheidt, supra note 96, for more details on developments in English law.
103 See hereinafter at 58.
104 Cass. civ. 2e, 9 July 1981, Bull. civ. II.No.156.
105 Cass. crim., 8 February 1977, Bull. crim., No.52.120.
106 supra note 26 at para. 240.
107 It should be noted however that French law readily admits the liquidated damages mechanism by way of the clause pénale (see Articles 1152 and 1226 of the French Civil Code), also akin to a private sanction, whereas the common law's use of this mechanism is much more restrictive. But this apparent paradox can be explained by the contractual nature of the clause pénale, which contrasts with the statutory or compulsory nature of punitive damages.
108 supra note 103 at para. 680.
109 C. Reymond, supra note 5 at para. 106 (Tribunal Sargans, 1982); J.-B. Racine, supra note 25 at 95, quotes the examples of Switzerland and Germany.
110 ibid., (1991) XVI Y.B. Comm. Arb. 97.
111 e.g. ICC cases 6216 and 6371, see hereinafter respectively at 58 and 60.