Drafting international arbitration clauses in your contract appears like a simple task from the outset. There are many examples online – all you need to do is to take the existing template, copy/paste it and tailor it to your needs. However, is this really true?
Arbitration is generally considered as a faster, cheaper and more confidential dispute resolution method in comparison to litigation. This is only true if the underlying basis of each arbitration process – the agreement to arbitrate – is properly drafted, valid and enforceable. Through their agreement to arbitrate the parties express not only their willingness to submit their dispute to arbitration but also specify the aspects of a procedure they wish to require. In order to have an eventually enforceable award, this first step – a properly drafted arbitration agreement is crucial. This article provides ten tips on what to include and pay attention to when drafting arbitration clauses in your contracts.
1. Express Agreement to Arbitrate
The first step is for the parties to be clear in expressing their willingness to submit their dispute to arbitration. The language used is very important- never use the permissive wording like “may”or “might” but instead use the words which expresses legally binding obligations like “shall” or “will”. You want to be clear whether the arbitration is mandatory or optional.
2. Choose between Institutional or Ad hoc Arbitration
The second step is choosing between so-called institutional or ad hoc arbitration. In institutional (also called administered) arbitration, the parties choose an arbitral institution which will assist them in logistical aspects of the proceedings and other practical matters. Some common examples are International Chamber of Commerce (ICC), the London Court of Arbitration (LCIA), the Permanent Court of Arbitration (the PCA), the Stockholm Chamber of Commerce (SCC), the Singapore International Arbitration Center (SIAC) and the Hong Kong International Arbitration Center (HIAC). A full list of major arbitral institutions may be accessed here. This assistance is for the exchange a small fee. Ad hoc arbitration, on the other hand, is more flexible in the sense that the parties have the freedom (and the obligation) to arrange the entire arbitration proceedings as they wish and tailor it to their own needs. There is no institution involved in the process, but there is still a need (and a recommendation) for the parties to designate a third, neutral party (known as an “appointing authority”) to have the final word on the selection of arbitrators if the parties fail to agree, as is often the case.
3. Choose a Set of Arbitration Rules
The third most important step is choosing the set of arbitration rules, which provide for the procedural framework for the proceedings. By choosing a complete set of arbitration rules the parties have saved themselves from having to agree upon all procedural aspects in relation to the proceedings, since the rules are a comprehensive set of rules which govern the procedural aspects of an arbitration and have been tried and tested. Each institution has a model clause suggested for parties who wish to include it in their contracts. A comprehensive list of suggested model clauses of the leading institutions is available here and parties are strongly encouraged to include one of the recommended clauses in order to avoid so called “pathological” and unenforceable clauses. In the case of ad hoc arbitration, parties usually choose the set of arbitration rules developed by UN Commission on International Trade Law (“UNCITRAL Rules”), which is specially tailored for non-administered arbitrations.
4. Seat of Arbitration
The seat of arbitration (also known as the place of arbitration) is extremely important as it determines the law governing arbitration procedure (procedural law, or lex arbitrii). Parties should select a neutral place, for example they usually choose the place where the local courts would most likely enforce the agreement and support the arbitration process, such as Paris, Geneva or London. The seat of arbitration is the juridical home of the arbitration so the parties should pay special attention since the choice can have important legal consequences. As a general rule, the parties should always choose a place in a jurisdiction which is a signatory to 1958 New York Convention on the Recognition and Enforcement of the Awards (the “New York Convention”) and whose national law is generally supportive of arbitration.
5. Defining the Scope of Arbitration
Make sure to carefully define the scope of arbitration as well. Unless you agree that all disputes, including tort claims and other extra-contractual remedies, arising out of the contract and from the business relationship are to be arbitrated, be sure to exclude disputes which are not to be submitted to arbitration. Be careful about the law of the seat and whether it explicitly excludes certain subject matters and disputes as inarbitrable (such as family law in most jurisdictions).
6. Define the Governing law
The parties should also specify the governing law (also known as the “substantive law”) which is usually set out in a separate clause from the arbitration clause. It is important to note that the governing law to the contract is not the same as the arbitration law or procedural law governing the arbitration. Although the parties are allowed to explicitly agree that it will be the same law, it is quite common for the governing law to be different from the procedural law.
Careful consideration should also be given to the manner of appointment of arbitrator(s) and the constitution of the tribunal. In the majority of cases, proceedings will be before one arbitrator (a Sole Arbitrator) or a three-member panel (an Arbitral Tribunal). The number should be non-even in any event. The number of arbitrators has an impact on overall costs and the duration of the arbitration (three arbitrators will be more expensive than one arbitrator and may take longer to issue a ruling). It is unnecessary to specify the number of arbitrators in the arbitration clause. While the parties have an option of deciding this issue once the dispute arises, the main disadvantage of this approach is that if the parties disagree on the number of arbitrators, this causes unnecessary delays to the overall proceedings.
8. Appointing Authority
In case of an institutional arbitration, many procedural rules provide for default rules on appointing arbitrators. However, in an ad hoc arbitration it is important to establish a method for selection and replacement of arbitrators. Absent such a specific provision, the courts at the place of arbitration may have to step in to make the necessary appointments/replacements since it is difficult for parties to agree on arbitrators once a dispute has arisen. Under the UNCITRAL Rules, in case the parties have not specified an appointing authority, it is the Secretary General of the Permanent Court of Arbitration who designates an appointing authority by default.
When choosing the language of the proceedings, parties should not only take into account the language of the contract but also the related documentation. Note that choosing one language is always preferred to multiple options. This is an optional element, and absence of the explicit agreement of the parties, it is for the arbitrators to decide on the language of the arbitration.
10. Mediation/Negotiations- Multi-tiered Arbitration Clauses
Multi-tiered arbitration clauses – which provide for mediation, negotiations or some other form of alternative dispute resolution (ADR) prior to initiating arbitration are a frequent part of arbitration clauses drafted nowadays. It may be helpful for parties to try to negotiate the settlement of their dispute before engaging in lengthier and more expensive arbitration proceedings, although it may also simply be a waste of time and costs. An important issue to take into account when including multi-tiered clauses is to make it clear whether it is mandatory or optional. If the parties use mandatory wording such as “shall”, recourse to mediation or negotiations is a condition precedent for arbitration. In this case it is crucial to include the explicit time limit beyond which the dispute can be submitted to arbitration. If the parties use wording such as “may”, this can mean that mediation or negotiations are only optional and parties may resort to arbitration as soon as the dispute has arisen.
11. Confidentiality Obligations
Certain Arbitration rules provide for built-in confidentiality provisions. However, the parties are free and encouraged to include express confidentiality obligations and remedies for their breach, since not all arbitration clauses require confidentiality and the laws of many seats of arbitration do not require this either. The scope of this obligation can vary – from the disclosure of the existence of the arbitration, to confidentiality of the documents, evidence or any correspondence between the parties and the tribunal and interim and/or final awards.
This list is not exhaustive – and there are other details and optional elements which the parties might wish to take into account. In 2010, the International Bar Association published IBA Guidelines for Drafting International Arbitration Clauses, available here, which is a comprehensive guide to drafting arbitration clauses and making sure there is a valid and enforceable clause giving you full access to arbitration once a dispute has arisen.
- Nina Jankovic, Aceris Law, International Arbitration Law Firm