Generally in international commercial transactions, commercial arbitration as a form of alternative dispute resolution is preferred to formal litigation in the courts. Some of the reasons for commercial arbitration are as follows:

  1. In comparison to the formal courts, the arbitration process is simpler, quicker, cost effective, and predictable.
  2. Commercial arbitrations are less hostile hence, the resumption of commercial relationship even after the dispute is possible after the arbitration.
  3. The remedy or solution to the dispute may be multidimensional in comparison to litigation.
  4. Arbitration can be kept confidential, which may become important in certain cases.
  5. Parties to international commercial transactions are more likely to accept commercial arbitration as fairer form of dispute settlement, as it can utilize neutral venue and personnel.
  6. In case of disputes with a state, it is difficult for local courts of foreign state to find jurisdiction. (however, the division of government exercising governmental functions and government exercising commercial function may allow exercise of jurisdiction by foreign court against a state).
  7. In international law of claims, it is sometime possible that the local courts may itself injure commercial entity (denial of justice), in such case it is imperative that international tribunals or arbitration are chosen.
  8. International investors may not be comfortable submitting itself to local courts, hence commercial arbitration may be chosen instead.


  1. Ad hoc and Institutional Arbitration
  2. Institutional arbitrations are administered by an organization according to its own rules of arbitration. Examples include, ICC, ICSID, etc.
  3. Ad hoc arbitrations are arbitrations conducted by arbitrators appointed by the parties or with the consent of parties and that functions independently of any institution.


  1. International Commercial Arbitration: is a form of dispute settlement process whereby the parties to the dispute agree to submit their dispute to a tribunal constituted according to the rules the parties themselves decide. The procedure adopted in the arbitration is also decided by the parties which results into handing over a final and binding award enforceable in law.

The most important element of an international commercial arbitration is the contractual element of arbitration. That is, the arbitration (including the jurisdiction of the arbitral tribunal, applicable law, procedure etc.) is determined only according to the consent of the parties to the dispute.

The consent to arbitration, on the other hand may be given either before the origin of a dispute or after the dispute has arisen.

Consent of parties to a dispute may be evidenced from the following acts:

  1. The primary contract upon which the dispute is based provides arbitration clause.
  2. Parties to the dispute conclude an arbitration agreement after the dispute has arisen between them.
  3. In case of mixed arbitration (that is arbitration between an individual and the state, the applicable international treaty has established the jurisdiction of an arbitral tribunal. See for example, BIPPA, Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention))
  4. Application of domestic law that provides compulsory arbitration.
  5. Forum prorogatum (that is, if a party appears and pleads to the merits of the case, or otherwise accepts jurisdiction ad hoc then the party so appearing is considered to have given consent to the jurisdiction).`However, when a party only appears before the tribunal to reject the jurisdiction of the tribunal the forum prorogatum rule is inapplicable.

In any case, an arbitral tribunal constituted according to the consent of the parties has the soul authority to decide upon its jurisdiction. The principle is referred as the principle of competence competence. Betsey case (1797) which was decided by an arbitral tribunal constituted according to the Jay treaty between the United States and Great Britain was the first case to use the principle of competence competence.

In addition to the principle of competence competence, the principles of separability provides that even in cases where the contract which provides an arbitral tribunal with jurisdiction is found to be void, the provisions of the contract that define jurisdiction of the arbitral tribunal should be separated from the contract and that such provision continue to operate.

  1. Judicial Features of Arbitration



Fairness in the application of procedure and judicial propriety.

  1. Applicable Law of Arbitration

The arbitration agreement may provide, in addition to the jurisdiction of the arbitral tribunal, seat of arbitration, applicable law, the nature of the tribunal, language of the proceeding etc. The seat of arbitration is the place where the arbitration takes place. In practice, it is not essential that the arbitration take place in the same place as indicated by the seat of arbitration clause. The main purpose of the seat of arbitration provision is to determine the applicability of the arbitration rule in case of the given arbitral tribunal. That is, if the seat of arbitration is in Nepal, the rule governing the arbitration will be Arbitration Act of Nepal.

The law of the seat of arbitration (lex arbitri) is important as that law provides sometimes supervisory jurisdiction to the local courts to ensure procedural fairness in the process. Lex arbitri is also relevant when a party intends to challenge an award on the ground of procedural questions. Lex arbitri is also relevant in situation of enforcement of the award. Particularly, the application of the New York Convention may become difficult in case of arbitration held in a non-member state.

In addition to seat of arbitration, arbitration agreement may also define the applicable law. Applicable law determines the source of law for the purpose of the arbitration. Parties to the dispute are free to define applicable law. In absence of the clear applicable law, the relevant arbitration rule determines the applicable law.

Parties while determining applicable law may choose to apply law of a certain country, general international law, equity (in the form of ex aequo et bono), lex merchantoria, non national law (example UNIDROIT Principles of International Commercial Contracts), stabilization clause (see the draft FITTA)  etc.

In other cases, for eg in case of ICSID article 42

(1) The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.

(2) The Tribunal may not bring in a finding of non liquet on the ground of silence or obscurity of the law.

(3) The provisions of paragraphs (1) and (2) shall not prejudice the power of the Tribunal to decide a dispute ex aequo et bono if the parties so agree.

UNCITRAL article 35

  1. The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate.
  2. The arbitral tribunal shall decide as amiable compositeur or ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so.
  3. In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract, if any, and shall take into account any usage of trade applicable to the transaction.


Interesting rule of applicability of law was seen in Channel Tunnel arbitration, (2007) 132 ILR 1.