Ex Aequo et Bono Decision-making in International Arbitration: Risks and Benefits

Lawyers and parties litigating in national legal systems, and even those familiar with the most of international commercial arbitration, are used to the fact that the merits (substance) of the dispute will eventually be resolved in accordance with some national law. In many, or most, situations that law might only play a gap-filling role and leave the brunt of rules to be within a contract or other instrument between the parties. But if those rules are silent, or issues such as vitiating factors, proper interpretation, or calculation of damages come into play, some national legal system is always there to provide default solutions.

What if the merits are to be decided without reference to any particular legal system? This is in essence what is known as deciding ex aequo et bono. The Latin term translates as ‘according to equitable and good’, and is usually understood as the mandate for the decision-maker (almost always an arbitrator, not a judge) to decide the dispute in accordance with their sense of fairness, equity, and conscience, and without necessarily basing themselves on any particular legal rules.

The risks seem obvious. Why would the parties want something so unpredictable? Instead of, e.g., well-known rules of contract law, one must rely on ‘fairness’ of an individual arbitrator. What is ‘good’ for one party, might be not ‘good’ for the other, and might be altogether a third thing for the arbitrator(s). In light of this, arbitral rules and relevant laws usually require explicit consent from the parties for accepting ex aequo et bono decision-making. Likewise, it remains generally unpopular, with a fairly tiny percentage of international arbitrations being decided in such a way.
But initial scepticism might be misguided. For example, as already discussed on this blog series, Basketball Arbitration Tribunal rules envision ex aequo et bono decision making as the default option (Article 15.1 BAT Arbitration Rules). Why so? For one, opting for ex aequo et bono can lead to quicker and cheaper proceedings as time and effort is not spent by any of the actors on potentially arguing which law is substantively applicable, and then on the intricacies of that law. Secondly, ex aequo et bono might not be that much ‘mysterious’ as is usually thought.

For example, as argued by Teramura, many national legal rules incorporate concepts of good faith, reasonableness, and fairness in any case and the difference between resolving the dispute based on these concepts and ex aequo et bono might be more apparent than real (see https://arbitrationblog.kluwerarbitration.com/2018/11/18/ex-aequo-et-bono-an-overlooked-and-undervalued-opportunity-for-international-commercial-arbitration/). Deciding ex aequo et bono does not mean that all considerations of rules are thrown out of the window and the disputes are settled based on arbitrators’ feelings. On the contrary, there is usually an increased focus on the actual wording of the contract or other instrument in question, along with potential supplementation with usages and customs of a particular trade. Again, this is most definitely not too far from what would be expected in any case.

In conclusion, ex aequo et bono decision-making should continue to make a bigger impact on the arbitration stage. In particular concerning smaller value disputes, insistence on intricacies of national laws or hinging the whole case on their potentially antiquated peculiarities might be misplaced. Arguably, if parties have faith in appointing an arbitrator, they should have faith that she or he can be fair and reasonable even without a national legal system as a back-up. Doing such a leap of faith can lead to considerable benefits that bring us closer to original ideals of quick(er) and cheap(er) arbitration.

Velimir Živković