The significance of Delocalisation Theory in the history of international commercial arbitration

International arbitration has become the principal and fundamental method of settling disputes between States, individuals, and corporations in almost every aspect of international trade, commerce, and investment [1]. Particularly, international commercial arbitration is the mechanism which provides greater flexibility and pliancy for the arranging of business transactions abroad; it simplifies the enforcement of foreign arbitral awards and standardizes enforcement procedures; and it strengthens the concept of safeguarding private rights in foreign transactions [2]. Petrochilos appropriately mentioned that arbitration is ‘the process whereby a third party determines a dispute between two or more parties in exercise of a jurisdictional mandate entrusted to him by the disputing parties’[3].

The significance of enforcement of awards and the meaning of arbitral seat in international commercial arbitration is of paramount and copious importance. Therefore there was a heated debate about the viability of delocalisation theory for over 20 years [4].However, it is still controversial issue whether to treat the delocalisation theory as expedient and fruitful conception in practical terms if we consider a matter in all its bearings.

The central practical issues with which this work is concerned may be formulated as follows: What are the advantages and disadvantages of delocalised and localised awards? The is question is analysed and investigated from a number of relevant perspectives in the following chapters by considering and examining to what extent awards which have been annulled in their country of origin can be enforced in France, Switzerland, and in England.

There are some controversial aspects of enforcement and recognition of awards which were set aside in the country of origin in different jurisdictions such as political aspects, different attitudes of countries towards enforcement. Insofar as I am an advocate of delocalisation theory, my dissertation work is devoted to the research about the degree of viability of delocalisation of arbitration, to what extent it is feasible and practicable. The delocalisation theory is just a theory not recognised in legislation, namely in practical sense. Therefore it is interesting to explore its actual purpose and how it works in practice.

First and foremost, it is appropriate to determine the concept of  delocalisation  theory. In  essence, it derives primarily from  the idea that parties from different countries, in  order to attain neutrality, wish to eschew as much as possible the interference of their respective courts, and simultaneously the application of the rules of their respective countries [5]. It is not representative of mainstream thinking which remains inclined to an idea seeking to detach international commercial arbitrations from controls imposed by the law of the arbitral seat (the lex fori) and to serve initially the interests of international trade [6]. In the contrary, ‘delocalisation’ refers to the possibility that an award may be accepted by the legal order of an enforcement jurisdiction whether or not the legal order of its country of origin has also embraced it [7]. Basically, it represents a quintessential choice or mode of international commercial arbitration [8].

Second, theories of ‘non-national’ or ‘a national’ arbitration have  sometimes  been  induced to justify enforcement of awards set aside at the place of arbitration [9]. According to the view of one of the outstanding proponents of delocalisation theory Philippe Fouchard, the country where a losing party has assets might recognise an award even if it had been vacated in the place of rendition. A fervent debate was generated among courts, arbitrators and scholars arguing on implementability of the theory.

In light of heated polemic, the concept of delocalised arbitration, advantages and disadvantages, case law of English, foreign jurisdictions, and recommendations based on completed research or so – called investigation will be presented and discussed in the following chapters, respectively.

The international commercial arbitration system works perfectly within a framework that has five interwoven aspects:

1. Expedient arbitration clauses;
2. Efficient procedural rules;
3. Proficient arbitral institutions;
4. National laws that assists arbitration; and
5. International treaties that assure the recognition of agreements to arbitrate and the enforcement of foreign arbitral awards [10]. They all comprise tiny inherent elements of one solid root of international commercial arbitration in its history and gradual development. Alternatively, we can enunciate that international commercial arbitration is enrooted progressively due to the indefeasible assistance and support of national courts, due to the application of procedural and substantive rules in settling dispute, due to the administration of arbitral process by impartial and independent arbitrators, and of course, due to the workability of national laws and transnational rules.

The meaning of the delocalisation concept was argued by Professor Fragistas for the first time in the history of international commercial arbitration. He emphasized that the parties are not only free to choose the applicable procedural and substantive law in international arbitration, but also they can detach the arbitration from the national law, and lodge it to international law so as to be «a-national», «supranational», «detached», «stateless», «transnational», or «floating» arbitration. It can be drawn up an idea that the usage and application of transnational rules of law in international arbitration, instead of a national substantive law is in fact the demonstration of an attempt to inherently «delocalize» international contracts, in order to extract them from too close a relationship with a distinct municipal legal system [11].

The delocalised system emerged on a basis of certain theory. Therefore, it is vital to divine the sense of different theoretical approaches employed in different jurisdictions in order to determine whether the award can be enforced are controlled by the relevant national laws [12]. The statements about the nature of arbitration have been gathered into four different theories: the jurisdictional theory, the contractual theory, the hybrid theory (or the mixed theory) and the autonomous theory. Amongst them, the jurisdictional theory is connected with a foundation of the entire supervisory powers of states, specifically with strong basis for the national courts to adjust any international commercial arbitrations within their jurisdiction, whereas the contractual theory demonstrates that international commercial arbitration originates from a valid arbitration agreement between the parties and that, therefore, arbitration should be carried out according to the wills of parties. In fact, jurisdictional theory ignores the existence of delocalisation and flexible method to settle their disputes outside of the court systems [13]. This view also asserts that arbitrator, like the judge, eventually derives his authority and power from the national law in force at the seat of adjudication [14]. Moreover, jurisdictional theory negates the substantiality that arbitration is also contractual [15].

The hybrid theory is a rationale for proportionality between the jurisdictional and contractual theories – it means that the theory with both a contractual and a jurisdictional character accepts that private adjudication can subsist without delegation  from the state. Finally, the autonomous theory, which has been evolved and cultivated more recently, rejects the traditional approach and accentuates on the purpose of international commercial arbitration. Instead of fitting arbitration into the existing legal    framework or so called legal vacuum, the autonomous theory determines arbitration as an autonomous institution, which should not be limited by the law of the place of arbitration. In the long run, parties should have unlimited autonomy to decide how the arbitration shall be waged. However, one of the critical sides of autonomous theory is that because of the parties‘ wishes to arbitrate and the supra-national nature of arbitration, arbitration agreements and arbitral awards should be enforceable in any country [16]. Moreover, by virtue of the autonomy of the institution, courts should not interfere with arbitration process. However, complete disregard of courts will lead to immense problems insofar as national courts have pervasive and substantial role in conducting arbitral proceedings [17]. It can be derived that each theoretical approach has drawbacks as well as privileges. However, we can understand that delocalisation is a key ingredient of autonomous  theory consequently, this approach has also benefits and detrimental sides.

From the mid-1900s there was a fervent debate about the two main schools of thought – localisation and delocalisation which has generated and formed arbitral practice and the laws of states. In particular, the courts have taken two contrasting approaches in considering whether to enforce the award which has been set aside in the country of origin: the territorial approach and delocalised approach. The territorial approach, ‘seat theory’ or ‘localisation theory’ is differentiated with its dominance of the law of the seat which governs the creation of arbitration agreement and composition of the arbitral tribunal [18]. The „localisation« theory that an arbitrator should apply the substantive law of the seat  of arbitration – was widely acknowledged in the 1940s and 1950s. It constitutes a true supervisory power of the courts at the seat of arbitration to set aside which ensures that legality, equality and liberty of parties is respected [19]. The parties’ agreement is mainly subordinates to the lex arbitri [20] or alternatively, the seat anchors arbitration to the legal order of the state in which it takes place by providing certainty and encouraging simplified recognition and enforcement of the award [21].

There are four solid conveniences argued with ardour by Mann F. A. concerning the territorial approach which should be mentioned in due course. Firstly, other state’s courts may not exercise effective control over the arbitral process and arbitral tribunal’s composition and activities. Secondly, every arbitral activity should be subject and attributable to its own jurisdiction. Thirdly, the law of the seat is the most closely connected with the   arbitral proceeding. For instance, in the Swiss case named Egetran SA v Utexbel SA et Cour de Justice civile du Canton de Genève, it stated that the law applicable to the arbitration agreement was the law of the seat of the arbitration. And fourthly, the law of the seat is the only one which can ensure conflicts rules for arbitrators. From the abovementioned statements of Dr. Francis Mann, we can see that he had been one of the strongest antagonists of the concept of delocalisation theory. Enunciating the doctrine of the lex loci arbitri or forum situs or place of arbitration, Mann wrote: «Every arbitration is a national arbitration, that is to say, subject to a system of national law [22]. Every  arbitration  is  necessarily subject to the law of a given State. No private person has the right or power to act on any other level other than that of a municipal law. Every right or power a private person enjoys is inexorably conferred by or derived from a system of municipal law which may conveniently be called the lex arbitri. It can however be submitted with confidence that an arbitration to have its seat in England is always and necessarily governed by English rules of procedure, including the Arbitration Act 1950» [23].

Conversely, delocalised approach is based on the completely opposite concept, opposite nature, and opposite objectives. It is not mandatory to arbitrators to apply the procedural rules in force in the state of the seat of arbitration. Arbitrators deduce their powers from the sum of all the legal orders that recognise the legitimacy of the arbitration agreement and award. Unlike a national judge, thus it is considered that arbitrators have no forum even for procedure and choice of law, which refers to the idea that arbitrators do not have to abide by the rules of forum. The role of arbitrators in the arbitral proceedings is immense and of inherent importance in arbitration. Mayer made an emphatic point that there is a fact which should be mentioned: ‘the arbitrator is not considered as a substitute for a state judge; he is regarded as a judge administering justice in the name of the international community of merchants’. Of all arbitrators’ duties and obligations, the obligation to aspire to or obtain an enforceable award may certify the most persistently troublesome, as it entangles not only clashes among the different duties themselves, but also contradiction between the arbitral seat and the law of the enforcement forum.

According to the abovementioned – localisation and delocalisation approaches, there was an establishment of two opposite doctrines reflecting contrasts in relation to the theory of enforcement of awards:

• Those who are in favour of delocalisation theory, for example, scholars such as Jan Paulsson,
• Bernini, Fouchard, Goldman, Frederic Eisemann, Lambert Matray, Pierre Lalive, Philippe Kahn, Eric Loquin, Lotfi Chedly, Jean-Baptiste Racine [24] and etc.;
• Those that reject the existence of delocalised arbitration and who are in favour of territorial approach – academics and professors such as William
• Park, F. A. Mann, Roy Goode, Albert Jan van den Berg, Pieter Sanders, Bucher A., Schwartz and etc. On a basis of the research of the abovementioned scholars and academics the controversies’ concerning the viability of delocalised arbitration, facts and arguments will be contemplated deeply in discussing pros and cons of the theory, strengths and weaknesses.

It can be deduced  obviously  that  proponents of the delocalisation theory have a dream that one day internationalcommercial arbitration will be floating without any restriction from national laws; whereas proponents of the seat theory affirmed that one would never escape from a national jurisdiction [25]. One of the outspoken opponents of delocalisation theory, Roy Goode argues that delocalised system of law represents a disregard for international comity principles by disowning from the lex arbitri [26]. He contemplates that contemporary international arbitration does not need the delocalised arbitration at all insofar as it has some risks of divergent decisions and the disintegration rather than the harmonisation of rules or preservation of uniformity of awards around the globe. Moreover, Craig has also commented by flamingly discarding the viability of delocalised awards as the following:

‘States have been unwilling to accept the idea that there is no link between arbitral proceedings in their territory and the state’s legal regime, and the idea that arbitral awards rendered in their territory should be considered a-national awards’ [27].

Nevertheless, considerable ink has been spilled by scholars and practitioners on the issue of viability of delocalisation theory. In any case, the primary postulate of the delocalisation theory of arbitration is that an arbitration proceeding is not rendered invalid by virtue of the fact that it is conducted independently of both the laws and the courts of the place of arbitration provided transnational minimum standards are observed by the arbitrators [28]. Furthermore, the main inherent features of delocalized arbitration are the following:

1. It is detached from the procedural rules of the place of arbitration,
2. It is detached from the procedural rules of any specific national law,
3. It is detached from the substantive law of the place of arbitration,
4. It is detached from the national substantive law of any specific jurisdiction [29].

It proves that the delocalisation theory embraces all the contents, from substance to procedure, and every facet of international commercial arbitration.

Delocalisation theory can be applied at two stages of the arbitration proceedings [30]. One is delocalising the arbitral procedures from the surveillance of the lex fori. The other one is delocalising arbitral awards which refer to removing the power of the courts at the place of arbitration to make an internationally valid and forceful declaration of the award’s nullity. While delocalised arbitral process guides to arbitration which is autonomous of the purview of any municipal procedural law and courts, the concept of delocalisation of awards is slightly more nuanced. The latter acknowledges the power of the supervisory courts but limits their power [31].

Therewith, there are also two intrinsic types of delocalised arbitration which we shall distinguish: ‘geographical’ and ‘legal’ delocalisation. Geographical delocalisation sets out submitting arbitration to a lex arbitri other than that of the seat which joins the arbitration to the law chosen by the parties. It attempts to evade the rules and state’s court control where the arbitral proceedings take place by allowing parties to make a selection among rules and among courts. However, this theory is on the verge of disappearing insofar as there are various complexities and considerable risks of positive and negative conflicts of jurisdiction [32].

On the other hand, legal delocalisation is the common type employed in international commercial arbitration. It implies the removal of arbitration from all national systems where arbitration claims to be free. No rules shall be applied, no control fulfilled – at least, until enforcement is sought. Gabrielle Kaufmann-Kohler has stated, ‘the choice of the seat is nothing but the choice of the law applicable to the arbitration’. Jean Francois Poudret and Sebastien Besson agreed with G.Kaufmann-Kohler by declaring that any possibility of avoiding the lex arbitri of the country of the seat or choosing a foreign lex arbitri is a source of worthless complications and intricacies.

Obviously, laws of the seat have an adequate connection so far as national courts are involved, but whether the same is true in arbitration is disputed [33]. Garnett argued that the parties can shape their own procedural law without regard to local statutory rules in delocalised arbitration. It can be inferred that delocalisation can only operate as long as quasi autonomous international procedural rules   emerge [34]. Therefore, the application and choice of procedural law is another important aspect of arbitral proceedings.

To conclude, there was a representation of origin or wellspring of delocalisation theory – theoretical approaches developing in the history of international commercial arbitration; the idea underlying delocalisation – types, objectives, importance; proponents and opponents of the doctrine – their opinions, convictions and condemnations; the role of national courts and procedural law in international commercial arbitration, inter alia, in delocalised arbitration.

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