CLS Blue Sky Blog

How Arbitrators Interpret Contracts

I suspect that most issues of contract interpretation call for the application of what Stefan Vogenauer has termed “universal hermeneutic truths”—that is, the search for meaning by going no further than “common sense” and how language is “commonly and naturally deployed.”  An arbitrator does this not only by worrying the text of an agreement, but more broadly by attempting to identify the underlying narrative—the sense of the transaction. These are universal lawyerly skills.  And should an agreement run out of guidance for settling a dispute, a further step would move from interpretation, as commonly understood, to the process of filling a gap in a responsible way. When we are in the realm of default rules, or presumptions, or burdens of proof—similar if not identical notions—recourse has to be made to the contract law of the legal system governing the contract.

In doing so, we need first to dispense with some lingering red herrings—for example, the supposed dichotomy between subjective and objective standards of interpretation, over which so much ink has been spilled, or the supposed preference in some legal systems for a textual or literal rather than purposive style. In the interest of offering contracting parties commercially sensible results, our modern law of agreement has evolved to create a carefully calibrated structure, one that seamlessly moves back and forth between the realms of the internal and the external, the so-called subjective and objective, incorporating a subtle dialectic between them. The result will defy labeling and neat theoretical classification, which is hardly a reason to detain us, as such exercises are rarely of much functional interest. So when English judges occasionally say that we shouldn’t pay attention to the subjective intentions of the parties, it’s important not to over-read this.

The main event, though, is to consider the particular ethos and peculiar contribution to all this of arbitral justice. However framed, the questions we are addressing begin very much to look as if they belonged to the realm of appreciation of context and of commercial reality—questions that arbitrators are thought particularly well placed to answer and which are routinely entrusted to them.

As they are not organs of the state in which they sit, arbitral tribunals are liberated, first, in their choice of the appropriate governing law.  This is a point that has been tediously rehearsed in the literature and I find it hard indeed to believe, or even pretend, that it presents any serious intellectual interest.

Whether an arbitral tribunal is given (in the absence of party choice) the power to choose “the law determined by the conflict of laws rules which it considers applicable” or, alternatively, the power to choose directly “the law which it determines to be appropriate” or “the law or rules of law which it considers to be most appropriate” is I gather a matter of intense conceptual and theoretical interest.  But I very much doubt that it is likely to lead to any substantial functional differences in application.

(a) To say that arbitrators may choose appropriate rules does not mean that they can legitimately reason in a manner such as this:

“Looking at the various interests in conflict in the case before us, we find an elegant solution, an ingenious and sensible balancing, contained in the Civil Code of Eritrea [or the Civil Code of Lilliput or the Code of Hammurabi].”

Such an approach would be most ill-advised, because even under the so-called voie directe (that is, giving the arbitrators the power to determine the appropriate law), some underlying analytical framework, some heuristic—even if unstated—leading them to the appropriate law must be in play. What remains critical throughout is the expectation of the parties and the fairness of binding them to a particular body of laws. And that is precisely the work that a conflict of law analysis is expected to perform:  Just as the parties’ own choice of law is a surrogate for the conflict of laws analysis that a court would perform in its absence, so the reverse must be equally true so that tribunals should be expected to choose the same laws that the parties themselves might have chosen had they been willing or able to settle on an agreed choice of law.

(b) Conversely, it seems naïve to assume that a conflict of law analysis mandated by the voie indirecte (that is, first instructing arbitrators to determine what conflict-of-law rules are applicable and then determine the applicable law under those rules) can really be pursued by tribunals in two distinct stages sealed off from one another like watertight compartments.  No adjudicator whose mission is to achieve a fair result in accordance with party expectations can be presumed to act with blank indifference, neutral to and in abstraction from the practical results of the choice: The choice of law is likely to be tendentious and teleological, the process conducted with a view to the outcome that the applicable law will generate.

Second, (and a far more interesting subject), is arbitrators’ freedom in the appreciation and application of the law. To suggest that arbitral tribunals are to be mediums channeling the voice of state courts, or parrots mimicking them—applying the law strictly in the manner of the courts of a particular jurisdiction—is I believe misguided. How naïve  would it be to take as a self-evident premise the unfailing and continuing ability of judges (let alone juries) to produce, over time, reliable results that remain responsive to the needs either of participants in the market or of the general polity? It may in fact be the peculiar contribution of arbitrators to test these rules of law, questioning and qualifying them, reconstructing commercial law incrementally by realigning arbitral decisions with changing practices.

By contrast, distinguished commentators have written that the arbitral tribunal’s “insulation from consequences is not the same thing as conferral of discretion.” But I fear that such a proposition could only be seriously advanced by those quite untouched by any notion of  Legal Realism.

This post comes to us from Professor Alan Scott Rau at the University of Texas at Austin School of Law. It is based on his recent paper, “Arbitrators and the Interpretation of Contacts,” available here.

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