## Facts

- An Austrian equipment franchisor (claimant) and a South African franchisee (respondent) entered into a franchise agreement concerning the sale and production of certain machines in South Africa.
- The franchise agreement required the franchisor to deliver specified documents/technical materials to the franchisee in South Africa.
- The agreement required the franchisee to pay royalties to the franchisor.
- The agreement placed on the franchisee the obligation to obtain South African exchange-control consent before making royalty payments abroad.
- The contract contained an arbitration agreement referring disputes to arbitration under the International Chamber of Commerce (ICC) framework, but it did not name an arbitral seat.
- A dispute arose out of performance of the franchise relationship, including obligations connected to documents/technical materials and royalty payments affected by exchange-control restrictions.
- The matter was submitted to ICC arbitration.
- The ICC Court of Arbitration selected London, England as the place (seat) of arbitration and appointed the arbitrator.

## Issues

1. What substantive law governs the parties’ franchise dispute where the contract points to Austrian law, but performance and payment occur in South Africa?
2. To what extent must the tribunal take account of South African exchange-control regulations that restrict or condition outbound royalty payments?
3. Can the franchisee rely on the absence of exchange-control consent—where the franchisee undertook to obtain it—as a defense to the franchisor’s claim for royalties?

## Decision

- The tribunal treated the parties’ choice of Austrian law as controlling for the contract’s substantive rights and obligations.
- The tribunal also took account of South African exchange-control regulations as mandatory rules affecting the legality and practicability of performance in South Africa, including the mechanism and timing of royalty payments abroad.
- The tribunal placed responsibility for securing the required exchange-control consent on the franchisee, consistent with the franchise agreement’s allocation of that duty.
- The tribunal did not accept the franchisee’s own failure to obtain the needed consent as a complete answer to the franchisor’s royalty claim; the contractual payment obligation remained, subject to compliance with the mandatory exchange-control regime.
- Procedurally, because the arbitration clause did not specify a seat, the ICC Court’s designation of London supplied the seat for the proceedings.

## Legal Principles

- Party autonomy in international arbitration supports giving effect to an express contractual choice-of-law clause; the chosen law (here, Austrian law) supplies the primary substantive rules for the dispute.
- Even when a contract is governed by a chosen law, mandatory rules of another state with a close connection to performance (here, South African exchange-control rules) may be applied or considered to prevent awards that require unlawful performance where performance must occur.
- When a contract assigns one party the duty to obtain governmental or regulatory permission for performance (such as exchange-control consent), that party generally bears the risk of failing to secure it and cannot use its own nonperformance of that duty as a full defense to payment.
- Where an ICC arbitration agreement omits the seat, the ICC Court of Arbitration may designate the seat, and that designation sets the legal place of arbitration for procedural purposes.

## Conclusion

In ICC Case No. 5460, an Austrian franchisor and a South African franchisee arbitrated a franchise dispute involving document delivery obligations and royalties subject to South African exchange-control consent. The ICC Court fixed London as the seat. On the merits, the tribunal applied Austrian law as the governing law of the contract while also giving effect to South African exchange-control rules as mandatory constraints on payment performance, and it held that the franchisee—tasked by contract with obtaining exchange-control consent—could not defeat the franchisor’s royalty claim by pointing to its own failure to secure the required permission.


Final Award in ICC Case No. 5460, XIII Y.B. Comm. Arb. 104 (1988)