Key Considerations in Drafting an Arbitration Clause

Key Considerations in Drafting an Arbitration Clause

The method of resolving disputes that arbitration has become is directly in proportion to the rise in international business arbitration. Arbitration agreements, almost always in the form of an arbitration clause within a wider contract, lie at the heart of any arbitration process. Given the ever-increasing effectiveness of arbitration as a means of international business dispute resolution, one must assume a kind of inertia—that the parties and drafters of the clauses in question must be doing something right. And to decrease that very small risk of something going wrong, this article highlights the important things to keep in mind when drafting an arbitration clause.

The Importance of Getting it Right

An arbitration clause that is well-drafted is important for several reasons: It provides clarity and certainty on how disputes will be resolved. It can save time and costs by avoiding disputes over the arbitration process itself. It allows parties to tailor the dispute resolution process to their specific needs. It can impact the enforceability of any eventual arbitral award.

As Gary Born notes in his seminal work on international commercial arbitration: “The arbitration agreement is the foundation stone of international arbitration. It records the consent of the parties to submit to arbitration — a consent that is indispensable to any process of dispute resolution outside national courts.”

Conversely, an arbitration clause that is poorly drafted can lead to serious problems, such as: Uncertainty over whether disputes are covered by arbitration; Procedural battles that increase costs and delay resolution; Difficulty enforcing arbitral awards; The clause being found invalid or inoperable.

Core Elements of an Arbitration Clause

Clear Consent to Arbitrate

• The most fundamental element is obtaining a clear and unequivocal consent from the parties to refer their disputes to binding arbitration. This seems obvious, but ambiguous language can lead to “gotcha” challenges. If you want to ensure that the arbitration agreement will not be challenged later, use mandatory language like “shall” and not permissive language like “may”. In a nutshell: If you have an arbitration agreement in your contract, the first thing it should do is create an obligation to arbitrate.

Scope of Arbitration

• The arbitration clause should very clearly define the kinds of disagreements that are to be worked out through arbitration. Some options include:

• All disagreements that arise from or relate to the contract.
• Only specific kinds of disagreements (like technical matters).
• Excluding certain claims from arbitration.
  Unless there is some specific dispute that the parties want to specifically exclude, a broad formulation is generally recommended to avoid any kind of uncertainty.
• Choice of Arbitral Institution
  Parties have to pick between: Institutional arbitration (e.g., ICC, LCIA, SIAC) and Ad hoc arbitration. If you want some help in picking one of these options, the broad distinction is:
• Institutions provide a set of rules that already exist, and they give you something to lean on if there are problems during arbitration. That is why, when parties choose to arbitrate, most choose institutional arbitration.
• Place of Arbitration
  The place (or legal seat) of arbitration is critical; it determines:

• The law that governs the arbitration process
• The courts that will have supervisory authority over the arbitration
• Whether arbitral awards may be reviewed and by whom
  When selecting a place, one should consider: Neutrality, A legal framework in which arbitration is favored, Membership in the New York Convention, Convenience for holding hearings. Some well-known places include London, Paris, Singapore, Hong Kong, and New York.

Number of Arbitrators
Parties typically choose between a sole arbitrator or a three-member tribunal. Factors to consider:

• Sole Arbitrator
  
  • Lower costs
  • Greater expertise
  • Faster process
• Three-Member Tribunal
  
  • Balanced decision-making
  • Simpler to manage
  • Preferred for complex/high-value disputes

Language of Arbitration

• Specifying the language avoids disputes and reduces translation costs. Consider: Language of the contract, Language of key documents, Language abilities of likely arbitrators.

Governing Law

• The law that governs the substance of the contract must be clearly stated. This may differ from the law of the arbitral seat.

Confidentiality

• In arbitration, parties generally enjoy privacy. However, confidentiality is not always automatic. If you would like to ensure the confidentiality of your arbitration, consider including an express confidentiality provision.

Practical Drafting Tips

• Use model clauses: Major arbitral institutions provide model clauses that can be a good starting point.
• Keep it simple: Overly complex clauses can create more problems than they solve. Focus on the essential elements.
• Be specific: Vague language can lead to disputes. Be clear about key elements like the institution, seat, and number of arbitrators.
• Think about enforcement: Consider where you may need to enforce an award and ensure the clause will be recognized there.
• Avoid asymmetrical clauses: Clauses that give one party more rights than the other may be unenforceable in some jurisdictions.
• Be consistent: In complex transactions with multiple contracts, ensure arbitration clauses are consistent across agreements.
• Think about interim relief: Consider whether to allow parties to seek interim measures from courts.
• Avoid unrealistic deadlines: Tight time limits for arbitrator appointments or awards may be impossible to meet.
• Consider multi-tier clauses: Some parties include negotiation or mediation steps before arbitration, but be careful about creating unintended hurdles.
• Seek expert advice: Given the complexities, it’s advisable to consult with experienced arbitration counsel when drafting clauses for significant transactions.

Read Also: Breach of Contract: Legal Remedies and Preventative Measures

Common Pitfalls to Avoid

John Townsend identifies “seven deadly sins” of arbitration clauses:

• Equivocation: Failing to clearly state that arbitration is mandatory
• Inattention: Not tailoring the clause to the specific circumstances
• Omission: Leaving out essential elements
• Over-specificity: Including too much detail, creating potential conflicts
• Unrealistic expectations: Setting impossible deadlines or requirements
• Litigation envy: Trying to replicate court procedures in arbitration
• Overreaching: Giving one party unfair advantages.

The Road to Effective Dispute Resolution

To draft an arbitration clause that is effective, you must consider a lot of factors and balance the need for a process that is clear and enforceable with the desire for a clause that sets out a tailored arbitration process for the parties. Standard arbitration clauses provided by arbitral institutions can serve as useful starting points (see Chapter 12; Aikens et al. 2010), but parties should not hesitate to customize institutional clauses to fit their specific needs and circumstances.

Focus on the key elements and the legal considerations mentioned in this article when drafting a process clause, and you will be able to write clauses that meet your clients’ immediate needs and also stand up to scrutiny at the time of a dispute if your clients are called to arbitrate. In law, as in life, you get what you pay for. And while the act of drafting may not directly pay immediate dividends, a well-drafted clause may obviate having to pay for a poorly drafted clause at the time when a dispute calls for the parties to engage in arbitration.

FAQ

What distinguishes ad-hoc arbitration from institutional arbitration?

Ad-hoc arbitration occurs without any help from an arbitral institution, whereas institutional arbitration is overseen by an established arbitration institution following its rules. Institutional arbitration offers clearer lines of authority and more assistance, but perhaps at a greater cost.

How vital is the selection of seat in an arbitration clause?

The selection of seat is vastly important since it decides the legal structure that will control the arbitration process, the judicial bodies that will have oversight authority, and can influence the extent to which the arbitration award can be enforced. Choosing where to place the arbitration seat is one of the arbitration clause drafter’s most significant strategic options.

Can parties modify the arbitral institution’s model clause?

Yes, they can, but should do so carefully. Minor modifications are common, but significant alterations may create uncertainty or conflicts with the institution’s rules.

Should the arbitration clause specify the qualifications of the arbitrators?

While you can specify arbitrator qualifications, it’s generally advisable not to use overly restrictive requirements that could make it hard to find suitable arbitrators. General requirements (e.g., expertise in the particular industry) may be helpful.

Should a confidentiality provision be included in the arbitration clause?

Although most arbitration is private, it is erroneous to equate privacy with confidentiality. Under certain circumstances, arbitrators may issue public awards, and even when they do not, there is nothing to prevent a losing party from making the arbitration proceedings and the award public. If confidentiality is a major concern, it is better to include an express provision in the clause when drafting the arbitration agreement.