International agreements allow the parties to choose the law which will govern their contract (substantive law). The parties will often compromise and subject the agreement to a credible law of a third country. In that case, the contract contains the applicable law clause, and the arbitrator will act and construe relevant facts in accordance with it.
However, if the parties did not choose the substantive law, the arbitrator will have more room for manoeuvre. Primarily, the arbitrator shall follow the rules of the arbitral seat, which usually refer to “appropriate” rules, under the arbitrator’s discretion. The arbitrator may consider it appropriate to apply a combination of all potentially relevant laws.
One of the advantages of arbitration over litigation is that, in arbitration, the parties, or the arbitrator, may subject the dispute to lex mercatoria – generally accepted transnational rules and customs.
Moreover, disputes arising from commercial contracts may be resolved by taking into account, for example, a well-known legal principle of “according to the right and good” (lat. ex aequo et bono). Finally, in international commercial arbitration, widely accepted and used are the neutral rules of the United Nations Commission on International Trade Law (UNCITRAL) – UNCITRAL Arbitration Rules.