In connection with a construction contract ('Main Contract') entered into by Respondent and X, Respondent subcontracted to Claimant the supply, installation and maintenance of electrical works (by virtue of an 'Agreement'). Claimant argues that Respondent wrongfully withheld sums due and refused to release performance bonds which had been issued, despite completion of the works and the fact that Respondent had itself received payment under the Main Contract. Claimant seeks damages and release of the performance bonds. Respondent argues that Claimant's arbitration request is inadmissible and that its claims are time-barred or estopped, and makes a counterclaim for damages. In an initial interim Award, the Arbitral Tribunal determines the law applicable to the merits of the dispute, rejects Respondent's defence regarding inadmissibility and partly approves/partly rejects its defence of time-bar and estoppel. In a second interim Award, the Arbitral Tribunal rejects Respondent's application for interim protection orders. In a third interim Award, the Arbitral Tribunal rejects certain of Claimant's claims, considers others to be without object and accepts others in principle, leaving the amount to be determined later. Respondent's counterclaim is admitted, due to Claimant's liability, the amount of the damages being left to be determined in the final Award.

In the majority final Award, the Arbitral Tribunal examines the various claims submitted by each party. In so doing, it applies Kuwaiti civil law, which it compares with the <b>UNIDROIT Principles</b> (Art. 7.1.6 (to determine whether conduct may be deemed to be 'gross mistake'), Art. 7.4.7 (reduction of damages according to parties' conduct), Art. 7.4.3 (3) (assessment of damages by court)). It awards Claimant payment for extra works and compensation for damage to electrical works. It grants Respondent compensation for office and site overheads, additional labour costs and for a certain proportion of its financial charges. The awards made to each party are set off against each other, leaving a balance in Respondent's favour. Arbitration costs are split between Claimant and Respondent in accordance with the success of their respective claims (90% borne by Claimant, 10% by Respondent).

<b>Law applicable to the merits:</b>

'Claimant contends that the issues of the entire dispute should be governed by Kuwaiti law, either as the law explicitly chosen by the Parties (art. 38 of the Agreement, art. 80 of the Main Contract) or, in the alternative, as the proper law of the contract in application of all the relevant criteria of Kuwaiti and other rules of conflict of laws.

Respondent submits that the Parties made a "negative choice", i.e. each Party intended to avoid the other Party's (Kuwaiti or Italian) national law and the law of a third country was likewise excluded. Respondent explains this submission by referring mainly to Clause 38 of the Agreement where the Parties . . . chose to limit the applicability of Kuwaiti law to one Party (the Claimant) and to its performance of the Agreed Works in Kuwait . . . Respondent concludes from this interpretation that the Parties have chosen, as the law applicable to the merits, that part of the Kuwaiti and Italian legislation which was common to them at the time the Agreement was entered into.

The Arbitral Tribunal holds that the Parties have neither explicitly nor tacitly agreed on the substantive law.

The choice of Kuwaiti law in the Main Contract (clause 80) between X and Respondent may not be understood to apply to the contractual relationship between the Parties as well; if the Parties had intended to refer to the applicable law clause in the Main Contract, they would have done so in the same way as they did in the first version of clause 20 of the Agreement (". . . in accordance with the settlement of dispute clause in the Main Contract . . .").

By Clause 38 of the Agreement, Claimant (not both Parties) undertook to abide "by the regulations and customs in Kuwait" and to "follow the rules of Kuwait and Kuwaiti law" . . . [The Parties] chose a wording the scope of which is obviously restricted to Claimant's and its staff's activities when performing the Agreement . . . By choosing such a restricted wording in Clause 38, the Parties did obviously not deal with the much wider question as to which law shall be applicable to their Agreement in general (validity, interpretation; each Party's rights and duties; statute of limitation, etc.)

In the absence of any clear indication by the Parties as to the applicable law, the Arbitral Tribunal shall apply the law designated as the proper law by the rule of conflict which it deems appropriate (Art. 13(3) of the ICC Rules).

The Arbitral Tribunal does not deem it necessary in this case to designate a national private international law in view of the fact that all rules of conflict which may be found in legislations which have some connection with this case, indicate to Kuwaiti law as the proper law of the Agreement:

The Agreement has been signed in Kuwait. It is both Parties' understanding that the place where a contract has been concluded is an important or even the decisive criterion in their respective national (Kuwaiti and Italian) laws. It may be added that the place of arbitration is in Italy which is an additional justification to take into consideration the Italian private international law in accordance with opinions expressed formerly in the doctrine . . .

The most characteristic elements of performance of the contract . . . are obviously the services rendered, the work done and the goods supplied by the Kuwaiti party. The place of residence of the party which has to carry out the characteristic performance of the contract at issue is the decisive criterion in Swiss private international law, which law is connected with this Arbitration in view of the fact that the proceedings are governed, inter alia, by the Swiss Intercantonal Concordat on Arbitration . . . This connection exists even if the applicability of Swiss law should be understood to be limited to procedural points only.

When looking directly to the substantive law with the closest connection, the Kuwaiti law must again be the conclusion. With the exception of the nationality and the residence of Respondent (Italy) the Agreement and its performance do not have any link whatsoever with other countries than Kuwait where the entire Agreement was discussed, concluded and performed. The price had also been agreed and paid in Kuwaiti currency.

However, in accordance with a well-established practice in international commercial arbitration, the arbitrators shall take account also of the principles generally applicable in international commerce . . . This proviso is particularly justified in view of the fact that the Parties refrained from choosing explicitly Kuwaiti law as the law on the merits . . .

The Arbitral Tribunal concludes that Kuwaiti law and, to the extent necessary, principles generally applicable in international commerce are applicable to the merits of the dispute.'