Partial award / Distributorship agreement / French supplier, Irish distributor of products in Ireland / Dispute over quality of products and amounts due by distributor / Determination of applicable law by arbitrator sitting in Paris / Contract clause specifies that the agreement is construed in accordance with the laws and regulations applying to members of the EEC / Art. 13(5) of the ICC Rules / Cumulative application by arbitrator of Irish and French rules of conflict / Rome Convention of 1980 considered / Irish law found applicable on the basis of the 'closest connection' rule of conflict

The parties entered into a distribution agreement by which Defendant (a distributor from Ireland) was given an exclusive right to sell Claimant's (French supplier) products in the Republic of Eire and a non-exclusive right to sell in North Ireland. At a very early stage in the commercial relationship, Defendant contested the quality of the products and refused to pay the amounts due to Claimant under the contract alleging a right of set off against damages suffered.

Applicable Law (Positions of the Parties)

Clause XX of the 1989 Distribution Agreement which provides for ICC arbitration states as follows:

This Agreement shall be construded (sic) in accordance with and governed by laws and regulations applying to members of the European Economic Community.

Claimant's position

Claimant argues that Irish law has been excluded by the parties, that clause XX of the 1989 Distribution Agreement applies and that the Agreement is governed by the common principles applied in the twelve member states of the EEC.

These arguments are elaborated on by Claimant in its written submissions as follows:

According to Claimant, the first draft "Distribution Agreement" was submitted by Defendant providing-in contrast to the versions of the 1987 and 1989 Distribution Agreements signed by the parties-for Irish arbitration, for Dublin as place of arbitration, for Irish attorneys as Arbitrators and for the agreement to be construed in accordance with and governed by Irish law or, where applicable, the laws and regulations applying to members of the European Economic Community. Therefore, it was clear that the parties, by agreeing on clause XX of the 1989 Distribution Agreement which was identical to the clause in the 1987 Distribution Agreement, decided to eliminate all references to Irish law, Irish jurisdiction, Irish attorneys acting as arbitrators and to Dublin as the place of the arbitration. Furthermore, the parties, according to Claimant, intended also to exclude French law.

Instead, the parties intended, according to Claimant, not to choose any particular national law but to refer to an international system of law, similar at least in principle, to lex mercatoria, or, for example, to clause 68 of the Channel Tunnel Contract. To state that the governing law should be Irish law would clearly defeat the intent of the parties.

Therefore, even if the Sole Arbitrator were to find clause XX of the 1989 Distribution Agreement regarding applicable law to be meaningless, he would be obliged to treat the contract as "anational" and to apply anational rules.

The references in the 1989 Distribution Agreement to certain Irish rules and regulations,

according to Claimant, are irrelevant to the choice of the applicable law.

Defendant's position

Defendant argues that this sentence of clause XX of the 1989 Distribution Agreement is without meaning and, therefore, necessarily invalid as a purported expression of an agreed choice of applicable law.

Consequently, the proper law falls to be determined by the application by the Sole Arbitrator of those conflict rules which he deems appropriate. Both the French and the Irish conflict rules are the only ones having a direct relation to the dispute and to the parties in question and, if applied, would result in the law of Ireland being the proper law governing the contract.

Defendant elaborates on this position in its written submissions as follows:

Defendant denies that the first draft contract was submitted by Defendant. Rather, according to Defendant, the first draft was submitted by Claimant and was the standard Claimant's Distribution Agreement providing for the French law as the law governing the contract. Defendant, however, rejected the law of France.

Since neither party accepted the national law of the other party, clause XX of the 1989 Distribution Agreement was a compromise, leaving the problem of the interpretation of the agreed wording unanswered.

The wording of clause XX, sentence three, of the 1989 Distribution Agreement, according to Defendant, however, is meaningless insofar as it is not capable of fulfilling the functions of the "proper law" governing the Agreement. The only meaning that could be given to said clause is that the terms of the Agreement are to be governed by European Community laws as such. By contrast, the clause cannot be deemed to refer to a system of law derived by extracting the common elements of the twelve different national laws of the EEC member states.

Consequently, the law governing the Agreement, according to Defendant, must be determined by applying the appropriate rules of conflict. Whether one applies the French or the Irish rules of conflict, the relevant criteria clearly indicate Irish law to be the applicable law.

Considerations of the Sole Arbitrator regarding the Applicable law

Pursuant to Article 13.5 of the Rules of Conciliation and Arbitration of the ICC ("the Rules"):

the parties shall be free to determine the law to be applied by the arbitrator to the merits of the dispute. In the absence of any indication by the parties as to the applicable law, the arbitrator shall apply the law designated as the proper law by the rule of conflicts which he deems appropriate.

As a general observation, the Sole Arbitrator notes the undisputed fact that neither of the parties accepted the national law of the other party. As a result, the parties agreed on wording according to which "the agreement shall be construded (sic) in accordance with and governed by Laws and Regulations applying to members of the European Economic Community". The first question, therefore, is whether this wording is to be considered as the parties' determination of the substantive law applicable to the Agreement, within the meaning of Article 13.5 of the Rules.

On this issue, the Sole Arbitrator finds, firstly, that the above wording was initially only part of a clause on the applicable law contained in a draft agreement submitted to Claimant by Defendant. Indeed, said clause provided for the Agreement to "be construded (sic) in accordance with and governed by Irish law or, where applicable, the Laws and Regulations applying to members of the European Economic Community" (my emphasis). Later in the negotiations, the words "Irish law or, where applicable, the" were deleted, so that only the present wording remained. It therefore appears to the Sole Arbitrator that the present wording, at least initially, was not intended as being, in itself, the determination of the substantive law governing the Agreement. Rather, the remaining wording was obviously meant as supplementary to the applicable national Irish law, then rejected by Claimant.

On the basis of the foregoing, the Sole Arbitrator does not find the remaining wording to be totally meaningless, as argued in first instance by Defendant. Rather, the Sole Arbitrator considers the wording as being a reference to European Community law, where applicable, including the European Treaties and the secondary body of Community legislation. This interpretation is meaningful even if one is of the view that it was not necessary in the Agreement to refer to European Community Law because of the fact that European community law, where applicable, is mandatory because it forms part of the national laws of each member state.

Nevertheless, the sole arbitrator does not consider the remaining wording as having a meaning going beyond what was stated above. In particular, the wording does not support Claimant's view that it means a reference to international legal or trade principles, such as lex mercatoria, or the common principles of the twelve member states of the European Community. If this has been the intention of the parties, they could have chosen and agreed on wording expressly indicating such a reference, as, for example, in Article 68 of the Channel Tunnel Contract, or by specifically referring to lex mercatoria. This, however, was not the case, since the parties did not replace the deleted reference to a particular national law-the Irish or the French respectively-by any specific reference to such anational rules.

Claimant further appears to be arguing that, by eliminating a particular national law, the parties implicitly expressed their intention to refer to anational rules and to exclude any national law. As far as this argument is concerned, the sole arbitrator considers that the parties, rather than eliminating by mutual agreement the Irish and French national law, were unable to agree on a particular national law, which is something different (see for example Lagarde, Revue de l'Arbitrage 1990, p. 668, in a note to the decision of the Paris Cour d'Appel of July 13, 1989, in the case Compania Valenciana de Cementos Portland vs Primary Coal). Indeed, in practice, the parties often leave the question of the law applicable to their contract open because they are unable to agree on it, thus leaving it up to the courts or the arbitrators, as the case may be, to determine the applicable law. Furthermore, the failure of the parties to agree on the law governing the Agreement cannot, in the sole arbitrator's opinion, be interpreted as an implied reference to some vague international legal or trade principles. Such reference must be made expressly and, if not expressly, then in an implied manner which gives reasonable certainty to the arbitrators or the courts, respectively, that the parties indeed agreed to submit their dispute to anational law or international trade principles, particularly considering the fact that such anational laws and principles, if not properly defined, are difficult if not impossible to assess.

Consequently, the sole arbitrator must determine the proper law by applying the rule of conflict which he deems appropriate, pursuant to Art. 13(3), sentence two, of the Rules. In ICC arbitration practice, different methods are used by arbitrators to determine the proper law of the contract on the basis of Article 13(3), sentence two. In the present case, the sole arbitrator has decided to apply both the Irish and the French rules of conflict, given that these are the only ones having a direct connection with the parties and the dispute. This method is generally referred to as "the cumulative application of the different rules of conflict" of the countries having a relation to the dispute (cf. Craig-Park-Paulsson, International Chamber of Commerce Arbitration, New York-London-Rome, 1985, Part III § 17.01, page 290; Y. Derains, "L'application cumulative par l'arbitre des systèmes de conflit de lois intéressés au litige", Revue de l'Arbitrage, 1972, p. 99 et seq.).

. . .

The Sole Arbitrator considers that the country with which the 1989 Distribution Agreement has the closest connection is Ireland, rather than France. Indeed, the Sole Arbitrator observes that more factors point to Ireland and not to France, such as the place of performance of the substantive obligations of the Agreement, and also the fact that the form of the Agreement and its terminology is that followed by the common law system rather than that followed by the French system, and the fact that the Agreement is in the English language. The same considerations apply to the 1987 Distribution Agreement.

Furthermore, the Sole Arbitrator notes that he would have come to the same conclusion had he chosen to apply generally recognised principles of conflict of laws. Under the latter approach, the rules of the Rome Convention on the Choice of Law for Contracts of June 19, 1980 ("the Rome Convention") would have been applicable. The Rome Convention went into effect for all ratifying countries, including France, on April 1, 1991. Following the deposit of the instrument of ratification of the Rome Convention by Ireland on October 29, 1991, the Convention entered into force on January 1, 1992, between Ireland and the countries which had already ratified it (Official Journal of the European Communities (O.J.E.C.) No. C 24/1 of January 31, 1992). More recently, Spain and Portugal have also ratified the Rome Convention (Communication of the Council 6428/82 of May 18, 1992). The increasing number of countries ratifying the Rome Convention indicates that the rules contained in it have a wide acceptance. The Sole Arbitrator therefore considers these rules to reflect generally recognised principles of conflict. As such they could be applied to the case of hand irrespective of the fact that they were not yet in force between France and Ireland when the Agreement was entered into and that they have no retroactive effect.

An analysis which applies the rules of the Rome Convention (Art. 4 para. 1) would find that the applicable law in the absence of choice is the law of the country with which the contract is most closely connected. Pursuant to Art. 4 para. 2 of the Rome Convention, it is presumed that the contract is most closely connected with the country in which the party who is to carry out the performance which is characteristic of the contract has its central administration. As applied to the present case, the Rome Convention would therefore designate Irish law as the proper law, since the characteristic performance of the present Agreement is the distribution of the bicycles in Ireland, where Defendant as distributor has its offices. Therefore, the application of generally recognised principles of conflict of laws would lead to the same result as the cumulative application of the Irish and French rules of conflict.

Contrary to Claimant's view, the Sole Arbitrator is not of the opinion that the designation of Irish law as the proper law governing the Agreement contradicts what the parties had intended when entering into the Agreement. Indeed, as stated above, the Sole Arbitrator is of the opinion that the parties could simply not agree upon a particular national law. By leaving this issue unresolved, each party assumed the risk, if one wants to refer to it as such, that the Sole Arbitrator would designate the other party's law as the law applicable to the Agreements.

Finally, the Sole Arbitrator observes that he is obliged in any event to take into account the provisions of the contract and the relevant trade usages, pursuant to Art. 13 para. 5 of the Rules.'