Most Arbitration Acts (including those following the UNCITRAL Model law) usually allow the parties to choose the substantive law to be applied, if it is a transnational contract. The Sri Lanka Act goes a little further. The material part of section 24(1) provides as under:
"(1) An 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"
Here, there is no limitation that the (main) contract should have a foreign element. Thus, even an agreement between two Sri Lankan residents or companies can (it seems), choose a foreign law. Of course, this provision applies "only to the extent agreed to by the parties", - as is emphasised in section 24 (3) [section 24 (1) and 24 (3)].
Section 24 (2) provides that failing any such designation (of the applicable law) by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable. However – and this is somewhat unusual – section 24 (3) provides that this provision shall apply "only to the extent agreed to by the parties". The question naturally arises, as to what is to happen, if the parties have neither chosen a particular system of substantive law nor opted for the conflict of laws rules. It is submitted that even in such a case, the arbitrator (like a civil court) will apply the rules of conflict of laws. This would be a reasonable course to adopt, in the circumstances [section 24 (2) and section 24 (3)].
Considerations of "general justice and fairness" can be applied, only if the parties have expressly authorised the arbitral tribunal to do so. This provision in section 24 (4) of the Sri Lanka Act is understandable (though the language is different from that adopted in the UNCITRAL Model Law). What is not understandable, is the provision also in section 24 (4), as under:
"The arbitral tribunal shall decide according to ….. trade usages only if the parties have expressly authorised it do so."
This would mean that trade usages will be relevant, only if the agreement adopts them. This approach is contrary to the UNCITRAL Model Law. The Sri Lanka draftsman had to adopt this course, presumably in view of some peculiarities of the commercial and legal scene in that country.
