Choice of law in arbitration: which substantive law the tribunal must apply

An express choice of law binds the arbitral tribunal to the legal provisions or legal rules agreed by the parties. If the parties choose the law of a particular state, section 603(1) ZPO generally treats that choice as a direct reference to the state’s substantive law, not its conflict-of-laws rules.

The exact clause therefore matters. It must show which legal provisions or legal rules are intended to govern the dispute. If the parties have made no such determination, section 603(2) ZPO requires the tribunal to apply the provisions it considers appropriate.

This article addresses only the substantive decision-making standard in pending arbitration. The seat of arbitration, procedural language and general jurisdiction are separate questions.

What an express choice of law does under section 603 ZPO

Section 603(1) ZPO refers to the legal provisions or legal rules agreed by the parties. The agreement may name the law or legal order of a particular state. It is then generally understood as a direct reference to that state’s substantive law.

Substantive law answers the merits of the dispute, such as the contractual duties that exist and the legal consequence attached to a breach. The choice therefore identifies the standard against which the tribunal assesses claims and defences.

The scope may differ if the parties expressly agree otherwise. The complete contract must therefore be reviewed. The choice should not be isolated from provisions that define its reach.

Separating substantive law from conflict-of-laws rules

Under section 603(1) ZPO, a reference to the law of a state generally leads to that state’s substantive law. Its conflict-of-laws rules are not automatically included. This distinction prevents the choice from leading through a further reference to another legal order.

The review should therefore ask whether the clause names substantive law alone or contains an express rule on the treatment of conflicts rules. An express deviation should not be inferred without examining the wording.

The contract should also identify the claims and legal relationships covered. A choice for the main contract does not automatically answer every question about a later amendment, a separate security agreement or a claim outside the contract.

When the parties choose legal rules instead of state law

Section 603(1) ZPO refers to legal provisions and legal rules. The parties may therefore agree a decision-making standard that cannot simply be equated with the law of one state. What matters is the substance of the agreement.

Such a clause must be connected clearly to the dispute. The tribunal must be able to identify which legal rules govern the claims before it. In a mixed contractual framework, the main contract, amendments, incorporated rules and arbitration clause should be reviewed together.

The agreement on law concerns the substantive standard. It answers a different question from the choice of the arbitral seat or procedural language. Those issues should be recorded separately in the contract review.

No choice of law: the fallback rule in section 603(2) ZPO

If the parties have not determined the applicable legal provisions or legal rules, section 603(2) ZPO applies. The arbitral tribunal must apply the provisions it considers appropriate. The statute assigns the determination of the applicable law to the tribunal in this situation.

Preparation becomes especially important for the parties. The request for arbitration, defence, contract and previous submissions should show the legal standard on which each party relies. This allows the tribunal to identify the different positions at an early stage.

The fallback rule concerns the selection of applicable legal provisions. It is separate from an express authorisation to decide on the basis of equity. Under section 603(3) ZPO, that decision-making power requires a separate express authorisation by the parties.

Reviewing the choice of law in pending arbitration

In pending arbitration, start with the complete arbitration clause in the context of the main contract. Then review amendments, incorporated general terms, applicable arbitration rules and later agreements.

The request for arbitration, claim, defence, procedural orders and correspondence are also relevant to the concrete dispute. Mark where the parties identify the applicable law, whether they agree different legal rules and which claims the choice is meant to cover.

For further preparation, see the articles on document production in arbitration and the right to be heard when new evidence is introduced. Both topics relate to organising documents and submissions in the proceedings.

Record the governing law and decision standard clearly

For the next review, quote the governing-law clause and record which claims, amendments and legal relationships it covers. If the agreement is unclear, trace the standard used by the tribunal through the procedural record.

Receive new articles and legal updates from the firm through BRANDaktuelle Rechtsnews.

Common questions on choice of law in arbitration

Does naming a state automatically choose its conflict-of-laws rules?

No. Under section 603(1) ZPO, choosing the law or legal order of a state generally refers directly to its substantive law. A different agreement must be made expressly.

What applies if the parties chose no law?

Section 603(2) ZPO requires the arbitral tribunal to apply the legal provisions it considers appropriate. This is the statutory fallback where the parties made no determination.

Is a choice of law the same as an equity mandate?

No. A choice of law identifies legal provisions or legal rules as the decision-making standard. Under section 603(3) ZPO, an equity decision requires a separate express authorisation by the parties.

Next step

Contract, arbitration clause, correspondence and deadlines should be collected. It can then be assessed whether negotiation, preservation or arbitration is central.