Amiable Composition and Alternative Dispute Resolution

The use of ex aequo et bono in historical and conventional trade and investment practice, firstly, in light of the Medieval Law Merchant, and secondly, under the modern law of international trade and investment is of great significance. According to the theory, medieval merchant courts decided disputes ex aequo et bono in response to “the law” of commercial practice quite apart from “the law” of princes.

Ex aequo et bono is an ancient concept which holds that adjudicators should decide disputes according to that which is “fair,” and in “good conscience”. This concept has a valuable and emerging significance in modern law. [1] It is ideally suited to resolving disputes between parties who are engaged in complex and long-term relationship or in emerging fields in which the law is either inadequately developed or unsuitable to resolve complex disputes. Despite its long history in international adjudication and even though it is enshrined in the Charter of the Permanent Court of International Justice, the concept of ex aequo et bono is often avoided on grounds that it operates outside of law, or is deemed to be contrary to law.

Specific emphasis is given to the application of ex aequo et bono to international trade disputes through the United Nations Commission on International Trade Law (UNCITRAL) and to the settlement of state-investor disputes through the International Center for the Settlement of Investment Disputes (ICSID). The crux of the discussion of ex aequo et bono decisions in action is the paramount interest in resolving disputes expertly, informally, expeditiously and fairly, rather than formally according to law.

For medieval times to modern, it’s possible to trace this concept historically and find out how ex aequo et bono might be revitalized in both international and domestic law.An argument can be forwarded that ex aequo et bono operates along a continuum rather than at a fixed point between law and that non-law illustrates how it can be both formulated and applied. It demonstrates how to relate ex aequo bono to the law of equity and how to reconcile it with “gap filling” under law. It also shows how discretion in applying ex aequo et bono can be subject to internal and external limits; and how parties can invoke it most effectively to resolve their disputes.

Rule 33(2) of the UNCITRAL [2] specifically authorizes an arbitral tribunal to decide as amiable compositeur or ex aequo et bono. It also circumscribes the power of a tribunal by requiring that the parties expressly authorize such action, and that the applicable law permit it. [3] Rule 33 is widely known and its implications are well understood including in relation to ex aequo et bono decision-making. Its enactment has influenced national and state legal systems that have provided for decisions ex aequo et bono in their commercial codes, model law [4] and judicial decisions. [5] Despite its influence, however, there is limited evidence of adjudication that relies extensively on the UNCITRAL model of ex aequo et bono decision-making.

ex aequo et bono and amiable composition

In the Arbitration and Conciliation Act, Section 28 contains provisions about the law applicable to the decisions of an arbitral tribunal.

Section 28- Rules applicable to substance of dispute: (1) Where the place of arbitration is situate in India,-

in an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being force in India;

in international commercial arbitration,-

the arbitral tribunal shall decide the dispute in accordance with the rules of law designated by the parties as applicable to the substance of the dispute;

any designation by the parties of the law or legal system of a given country shall be construed, unless otherwise expressed, as directly referring to the substantive law of that country and not to its conflict of laws rules;

failing any designation of the law under clause (a) by the parties, the arbitral tribunal shall apply the rules of law it considers to be appropriate given all the circumstances surrounding the dispute.

(2) The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorized it to do so.

(3) In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction. [6]

The International Scenario

In an international commercial arbitration, the tribunal has to decide the dispute according to the rules of law designated by the parties as applicable to the substance of the dispute. Sub section (1) of Section 28 says that where the place of arbitration is in India and the subject matter is a domestic arbitration, the tribunal has to decide the dispute in accordance with the substantive law for the time being in force in India It is further provided that any designation by the parties of the law or legal system of a given country is to be construed, unless otherwise expressed, as directly referring to the substantive law of that country and not to its conflict of laws rules. Where the parties do not designate any law, the tribunal has to apply the rules of law which it may consider to be the most appropriate given all the circumstances surrounding the dispute.

Under international law, the power of an international tribunal to decide ex aequo et bono is restricted. The tribunal must have regard to “the general principles of international law, while respecting the contractual obligations of the parties and the final decision of international tribunals that are binding upon the parties.” [7]  The choice of the parties to adjudicate ex aequo et bono must be expressly made and will not be implied.

Rule 33(2) of the UNCITRAL Arbitration Rules provides:

“The arbitral tribunal shall decide as amiable compositeur or ex aequs et bono only if the parties have expressly authorized the arbitral tribunal to do so and if the law applicable to the procedure permits such arbitration.”

UNCITRAL Model Law- Section 28(except clause (a) of sub-section 1) corresponds to Article 28 of the UNCITTRAL Model Law.

Analysis on the UNCITRAL Draft Model Law

An Analysis on the UNCITRAL Draft Model law is necessary, especially on of Art. 28, in order to study this concept’s application in modern day international law.

Article 28- Rules applicable to substance of dispute

The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. Any designation of the law or legal system of a given state shall be construed, unless otherwise expressed, as directly referring to the substantive law of that state and not to its conflict of laws rules.

Failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws which it considers applicable.

The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorized it to do so.

As Art. 28(3) says, the parties may authorize the arbitral tribunal to decide the dispute ex aequo et bono or as amiable compositeurs. This type of arbitration is currently not known or used in all legal systems and there exists no uniform understanding as regards the precise scope of the power of the arbitral tribunal. When parties anticipate uncertainity in this respect, they may wish to provide a clarification in the arbitration agreement by a more specific authorization to the arbitral tribunal. In all cases, including arbitration ex aequo et bono, the arbitral tribunal must decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.

The Role of the Amiable Compositeur (Equity clause in Arbitration Agreements)

Arbitrators must hear the parties and their respective proofs, or establish default against them, and decide according to the rules of law, unless they are dispensed from so doing by the terms of the submission, or unless they have been appointed as Amiable compositeurs. A commercial arbitration agreement mat contain a stipulation or a clause by which arbitrators are empowered not to apply strict or settled principles of law in the settlement of a dispute referred to them, but instead to settle such dispute by an application of what they deem to be fair and reasonable. In other words, such arbitrators are then meant to act as amiable compositeurs.

Courts which operate within the civil law system of continental European countries have tended to approve of the inclusion of “Equity Clauses” in commercial arbitration agreements and have been willing to ensure the enforcement of such clauses. For instance, in its decision in the case of Societe Intrafor Coloret Subtec Middle east Co. M.M. Gagnant et al ( Revue de l’ Arbitrage [8] ),the Paris Court of Appeal had occasioned to rule that commercial arbitrators were entitled to avoid the strict application not only of the provisions of law, but also of a contractual clause, so long as they did not infringe rules of public policy.

In contrast, common law courts have tended to frown upon and to discourage the inclusion of equity clauses in commercial arbitration agreements and have sought to strike them down. In Orion Compania Espanola de Seguros v. Belfort Matschappij voor Algemene Verzekgringen [9] , held that arbitrators must,in general, apply a fixed and recognizable system of law, and that the parties to a commercial arbitration agreement could not make question of law any less a question of law by purporting to agree that it should be divided by some extra legal criterion. Indeed, the relevant equity clause was held to be contrary to public policy and, therefore deemed to be invalid.

The views of the courts were not inconsistent as regards “ equity clauses” in an arbitral agreement. In Eagle Star Insurance Ltd v. Yuval Insurance Co Ltd [10] , LORD DENNING M.R. held that “this arbitration clause, in all its provisions, is valid and full of effect, including the requirement that the arbitrators shall decide on equitable grounds rather than strict legal interpretation”. Further His Lordship did not see anything in public policy to make this clause void. On the contrary, the clause seemed to be entirely reasonable. It does not oust the jurisdiction of courts. However, a contrary view was expressedin the case of Home and Overseas Insurance Co. Ltd v. Mentor Insurance Co.(U.K.) Ltd [11] , the arbitrators cannot decide without regard to law and according for example to their notions of what would be fair would not be a valid arbitration clause.

In reference to ‘Arbitrator not to be bound by the law” is observed in BERNSTEIN as follows:” Arbitration clauses in international commercial contracts and in some domestic contracts sometimes contain a provision that the arbitrators need not apply law, or a particular system of law. They may say that the arbitrator is “to act as amiable compositeur”, or is to decide “according to equity and good conscience”; “according to the customs and usages of trade” and with a view to effecting the general purpose in a reasonable manner rather than in accordance with a literal interpretation of languge” [12] .

Equity as against ex aequo et bono

In arbitration ex aequo et bono, the arbitrator is not bound by law rules or principles, but he could base his determination on equity and make his award on whatever basis he deems fair and reasonable, without even being bound to make legal reasonings for his findings. [13] A feature of international and domestic law alike is the distinction that is sometimes drawn between decisions based on the law of equity and decisions ex aequo et bono. Whereas decisions in equity are deemed to be preator legem, that is, part of the law, decisions ex aequo et bono are imputed to an extra-legal realm. The rationale behind this distinction is that adjudicators may “fill gaps” in the law based on principles of equity, but not based on notions of equality that are not reduced to principles and rules of law. Whereas equity is part of an applicable legal system, notions of equality associated with ex aequo et bono are deemed to reside in a moral, social, or political realm that is external to the law.

Those who support the distinction between decisions in equity and decisions ex aequo et bono treat equitable decision-making as part of international or domestic law with its own body of equitable rights and duties and legal relationships. They differentiate this body of equitable law from the non-legal relationships they associate with ex aequo et bono adjudication. As the late Justice Lauterpacht of the International Court asserted: “adjudication ex aequo et bono amounts to an avowed creation of new relations between the parties”. [14] As such “it differs clearly from the application of the rules of equity, which form part of international law as indeed, of any legal system.” [15] Lauterpacht’s assumption was that tribunals that decide ex aequo et bono create new relationships outside the law and in doing so, are not constrained by existing legal rights and duties.

The structural distinction between equitable and ex aequo et bono decision-making is overstated. The demarcation line between equitable discretion in law and discretion unrestrained by law is often difficult to draw. What differentiates them is primarily the pronouncement or inference by adjudicators themselves that they are deciding according to law or ex aequo et bono, whether or not they are doing so in fact. A truer differentiator is not whether discretion is grounded formally in equity or ex aequo et bono, but in how adjudicators use discretion in particular cases. That use of discretion depends, not on adjudicators claiming that they are “filling gaps” in law to avoid a non liquet than on how they exercise their discretion in fact.

Arguably, “gap filling” under the law of equity and decision-making ex aequo et bono directed at fairness between the parties operate at different stages along the same continuum, rather than by endorsing a formal divide between the two. [16] In summary, those who insist on a strict division between equity within the law and fairness outside the law achieve structural symmetry at the expense of the substantive ends which both conceptions of equity under law and fairness outside law share. Those shared ends include arriving at fair results suited to each case. If ex aequo et bono decisions are directed at redressing injustice, than they surely embody comparable ends to those sought through the law of equity.

A preferable approach is to recognize that the key issue under consideration is not whether adjudicators exercise discretion in equity or ex aequo et bono, but how discretion is exercised in fact and whether it complies with limits imposed upon that exercise.

CONCLUSION:

A pervasive requirement of decision-making ex aequo et bono is compliance with the dictates of practical reasonableness. That reasonableness is grounded in the efficaciousness of the process of decision-making viewed in light of the reasonable application of relevant practices and usages to the case at hand. The legitimacy of an ex aequo et bono decision does not depend on the formal legitimacy of the discretion but on its practical application. The measure of a just decision does not hinge on an explicitly articulated principle, rule or even standard of law, but upon notions of common sense, fairness and efficacy. This approach has the benefit of paying regard, not only to legal rights and duties, but also to important interests that are not ordinarily protected as rights. It can also help to salvage party relationships in the face of potentially complex and protracted disputes. Condemning such ex aequo et bono decision-making on grounds it operates not only outside the law but contrary to it does more than challenge adjudicative activism. It discourages adjudicators – and the parties who empower them – from pursuing the fair resolution of disputes when it is most needed, when the law fails to respond adequately to the need for justice. Those who prefer to wait for the law to respond to injustice and social inequity rather than resort to ex aequo et bono decision-making may have to wait indefinitely. Law reform may be impeded by political inaction, or it may be fragmentary. It argues for a practical process of reasoning that operates along a continuum of discretion. It advocates functional ways of resolving practical problems in which established legal solutions may be ill-adapted or simply, impractical.