Drafting the “perfect” arbitration agreement

While reasonable minds differ on what constitutes a “perfect” arbitration clause, a well-drafted arbitration clause consistent with best practice is certainly achievable. In this article, we explain how to draft an arbitration agreement which is both effective and adapted to the needs of the parties.

Clear and precise language

Clarity and brevity are key to avoiding an unenforceable arbitration clause and the costs and delays that follow. We recommend resisting the temptation to draft meandering, convoluted and repetitive arbitration clauses.

Parties are advised to eliminate words which are not essential to understanding the meaning and effect of the arbitration clause. Once the clause is drafted, the intention and meaning of the clause should be understood by a third party, be that a court or an arbitrator. The primary advantage of an effective arbitration clause is to ensure its validity and avoid any jurisdictional (and potentially costly) dispute regarding the scope and enforceability of an arbitration clause.  

Scope

The types of disputes that can be referred to arbitration should be clearly defined with a broad application.

The scope of disputes which are ripe for arbitration should be considered carefully by the parties in order to avoid depriving the arbitral tribunal of jurisdiction to hear all or part of the dispute and ideally, disputes submitted to pre-arbitral processes such as negotiation and mediation should be identical in scope to those disputes to be submitted to arbitration.

Exact wording is crucial: use of the phrase “arising under” the contract, for example, can often be seen to be construed more narrowly to cover only contractual claims, whereas the phrases “disputes relating to” or “arising in connection with” the contract are often construed more broadly.  

Seat of arbitration

The seat of the arbitration determines the procedural law of the arbitration, thus governing the availability of interim remedies, disclosure and enforcement of awards once made. This is not to be confused with the physical place of the hearings; although hearings often take place at the seat of the arbitration, they need not do so if the parties agree otherwise.

Key considerations when deciding on the seat should involve examining whether: the law of the seat is a common law or civil law jurisdiction, the procedures that may apply in the event of a dispute regarding the arbitration process, the grounds on which an arbitral award may be annulled and the availability of interim relief.

The consequences of a failure to select or agree a seat between the parties may be that the seat is left to be determined by the arbitral tribunal or the administering arbitral institution, in accordance with and subject to, the arbitration rules chosen by the parties.

Governing law

This is the law that governs the substance of the dispute. In some cases, the governing law of the relevant contract applies to both the contract and the arbitration agreement that is set out in the arbitration clause. In other cases, the law that governs the contract may be different from the law that governs the arbitration if it is expressly agreed to by, and set out in, the contract, as explained below.

The arbitration agreement is a contract in its own right and will survive beyond the substantive contract that contains it. The governing law of the arbitration agreement should be separately defined within the arbitration agreement as a separate matter from the governing law applying to the substantive contract (the governing law of the substantive contract governs the subject of the dispute and this law will be applied by the Tribunal to determine the merits of the dispute).

The matter should not be left undefined in the arbitration agreement. In international contracts, the place in which the contract is performed may differ from the governing law of the substantive contract. If the governing law of the arbitration agreement is not defined separately, uncertainty can arise. This can and should be avoided by simply designating the governing law of the arbitration agreement expressly within the arbitration agreement.

Arbitral Rules

Parties are advised to specify in writing the rules under which the arbitration is to be conducted, such as: the ICC Rules, the DIAC Rules or the LCIA Rules. Whereas the chosen governing law will dictate the law applicable to the substance of the dispute, the applicable arbitral rules will dictate the procedures to be followed throughout the arbitration. Some of the key considerations to take into account when selecting applicable arbitral rules include: the availability of expedited procedures, interlocutory relief, appointment of arbitrators and other relief.

The main advantage of agreeing applicable arbitral rules is that those rules provide certainty, predictability and avoid any further dispute about the rules that will govern the arbitration.

Once the arbitral authority and corresponding rules are selected, the parties should use the model clause recommended by that institution or entity as a starting point for drafting their arbitration clause to ensure that all the elements required to make an arbitration agreement valid, enforceable and effective are present.

Language

Language of the arbitration dictates the language of the award and all submissions and evidence given in the arbitral proceedings. It should therefore be stated clearly.

Arbitrators

The number of arbitrators which are appropriate for a certain dispute will often depend on the value and complexity of the dispute, which is difficult to ascertain before a dispute has arisen. In high value contracts, it is advisable to adopt a three-party Tribunal with one candidate selected by each party and a final candidate (usually the Chairperson or President of the Tribunal) appointed by the co-arbitrators. If an arbitral institution is specified but no provision is made for the number of arbitrators in the arbitration agreement, the institution will decide this for the parties in accordance with its rules, so the choice may end up being outside of their control.

The parties might also consider allowing for a qualifying set of criteria (such as industry-specific experience) for arbitrators but should refrain from being too prescriptive to avoid onerous constraints on the parties. Parties should also avoid naming specific candidates as this is unduly narrow and can lead to difficulties of availability or experience which could later expose any award to challenge.

A further consideration when appointing arbitrator candidates is to ensure that they are independent and impartial (and that they have expressly stated as such as well as disclosing any specific and relevant disclosures at the outset and throughout) and that they meet any requirements that have been agreed under the arbitration agreement (and that they have expressly stated as such). Taking these measures offers additional protection to any arbitral award made.

Other common issues

Multi-tiered clauses

An effective arbitration clause will often have a multi-tiered structure defining pre-arbitral procedures to achieve a negotiated resolution prior to an arbitral process even being initiated. This is often something that internationally active commercial entities insist upon including in their contracts, and for good reason. Negotiation and mediation can often be relied upon to avoid altogether the cost and time expense that arbitration entails and should therefore be carefully considered at the outset.

The arrangements agreed upon should include a clear process, a timetable for carrying out that process and effective, clear and undisputed trigger points for each stage of the process, as set out in more detail below.

The process should specify a period of time for negotiation or mediation or both. Commercial considerations will be key here but as an indicator, 30 days for each process is commonplace. The triggers applied to pre-arbitral milestones should be defined and undisputable events (i.e. a written request) which can be progressed by one party in the case of a recalcitrant respondent, which is often the case at this stage. If all of these processes fail, it should be clear that a party can resort to arbitration.

Authority and capacity to sign

In some jurisdictions, a power of attorney is required to enter into an arbitration agreement. Given that the arbitration agreement will usually be signed by way of signature of the main contract that the arbitration agreement sits within, it is worth checking that the signatory has the relevant authority to enter into the arbitration agreement specifically.

The International Bar Association (“IBA”) has produced a widely applied set of guidelines (the “IBA Guidelines 2010”) on drafting international arbitration clauses which any practitioner may consult if necessary.  

There is no one-size-fits-all approach when drafting arbitration clauses, specialist advice should be sought to ensure that the arbitration agreement is valid and enforceable.

Our expertise

With offices in many of the world’s major arbitration centres, including London, Paris, Geneva, Dubai, Hong Kong and Singapore, we are ideally placed to work with you both to prevent and to resolve disputes as they arise, whatever the law, language, rules, industry sector, or subject matter of that dispute may be. Our dedicated multicultural and multilingual specialists conduct arbitrations under both civil and common law systems and regularly act in arbitration-related domestic court proceedings.

Whether you are a state, a state-owned entity, a sovereign wealth fund, a corporate, a sports federation or authority, private business or individual, our strategically focused specialists will work alongside you through every aspect of any arbitration. Please contact Alim Khamis or your usual Charles Russell Speechly LLP contact if you would like to get in touch.