An Effective Arbitration Clause and Arbitration Agreement

1.      Scope of the Arbitration Agreement

The scope determines which disputes are eligible for resolution through arbitration. A poorly defined scope is a frequent cause of disagreements and may result in the tribunal lacking jurisdiction over some or all aspects of the dispute. Key considerations include: Wording: Terms like “arising out of,” “under,” or “in connection with” carry distinct meanings, with some being broader than others. Exclusions: Attempts to exclude specific types of disputes can lead to unintended complications and are best avoided when possible. Parties: It is crucial to ensure the correct parties are bound by the arbitration agreement. Issues may arise if the contractual party is, for instance, a newly formed joint venture with no assets or a state-owned entity. The agreement should clearly include the party against whom enforcement of any award will be sought.

• Define the types of disputes covered by arbitration explicitly.

• Use comprehensive wording to include all potential issues (e.g., contract interpretation, performance disputes, tort claims related to the contract).

• Avoid poorly drafted carve-outs, as they may cause unforeseen consequences and deprive the tribunal of jurisdiction over some disputes.

• Ensure the right parties are included, particularly those against whom enforcement might be sought.

Key Phrase:

“All disputes arising out of or in connection with this agreement…”

2.      Seat of Arbitration

The seat of arbitration establishes the procedural framework governing the arbitration. Its significance is paramount, as it influences critical aspects such as the availability of interim measures and the enforcement of the arbitral award. It is important to note that the seat of arbitration differs from the venue (the physical location where the arbitration is conducted) and the governing law of the arbitration agreement. While many parties prefer to select a 'neutral' jurisdiction as the seat, this should not be the sole factor in the decision. Arbitration laws vary across jurisdictions and can significantly impact the efficiency of the process and the enforceability of the award. Acknowledging these differences, CIArb has introduced the London Principles to guide parties in selecting a 'safe seat' for arbitration.

·       The seat determines the procedural law governing the arbitration (lex arbitri).

• Select a jurisdiction with pro-arbitration laws (e.g., Singapore, London, Geneva).

Example:

“The seat of arbitration shall be [City, Country].”

3.      Governing Law of The Arbitration Agreement

An arbitration agreement is considered an independent contract, separate from the substantive contract it accompanies. Therefore, the law applicable to the arbitration agreement, which determines its validity and scope, may differ from the law governing the main contract. In international transactions, complexities arise as the contract's performance might occur in one country, the parties could reside in others, and the arbitration seat might be in a completely different jurisdiction. If the arbitration agreement lacks a clearly defined governing law, this can result in prolonged disputes. Nevertheless, many arbitration agreements overlook specifying this crucial detail. To avoid potential complications, we strongly advise explicitly stating the governing law of the arbitration agreement.

• Specify the substantive law applicable to the agreement.

• Differentiate between the governing law of the contract and the procedural law of arbitration.

• Avoid lengthy disputes by explicitly stating the governing law of the arbitration agreement.

• Example:

“This agreement shall be governed by the laws of [Jurisdiction], and the arbitration shall be governed by the procedural law of the seat of arbitration.”

4.      Choice of Rules

A critical decision in drafting an arbitration agreement is whether to adopt the rules of a recognized arbitral institution, such as the ICC or LCIA, to govern the arbitration process. The primary advantage of this approach is that the institution, for a fee, takes an active role in managing the arbitration, and its rules provide a well-defined and predictable framework for the procedure.

If the parties prefer ad hoc (unadministered) arbitration, they may either create a tailored process, adopt existing ad hoc rules (like the UNCITRAL rules), or incorporate the rules of an institution while excluding the provisions that involve the institution's administrative role and associated fees. It is essential that these details are agreed upon before the transaction begins; otherwise, they must be negotiated between the parties at a later stage. Additionally, the parties might consider appointing an institution solely for the role of appointing authority.

• Specify the arbitration institution (e.g., ICC, LCIA, SIAC) or opt for ad hoc arbitration.

• Identify the procedural rules applicable to the arbitration, such as:

  • ICC Arbitration Rules

  • UNCITRAL Arbitration Rules

  • Institutional rules of the chosen arbitral body.

Example:

“The arbitration shall be conducted under the [Institution Name] Arbitration Rules in effect at the time of the dispute.”

5.      Language

The arbitration clause should specify the language to be used in the arbitration, particularly when the parties come from countries with different native languages. This decision is crucial as all submissions and evidence will need to be presented in the chosen language during the proceedings. Selecting the language most commonly used by the parties in their communications can help reduce translation and interpretation costs significantly.

• Specify the language to avoid procedural complications and ensure clarity.

• Choose the language most commonly used in communications between parties to save costs on translation and interpretation.

Example:

“The language of the arbitration shall be English.”

6.      Number and Appointment of Arbitrators

In general, for high-value or complex disputes, it is often recommended to appoint a panel of three arbitrators. On the other hand, for disputes that are less complicated or of lower value, a sole arbitrator may be more practical and cost-efficient.

In cases involving multiple parties, where it is difficult for each to select an arbitrator, the parties should agree on an appointment process. For example, they may decide that an appointing authority will make the selections.

• Number of Arbitrators:

  • One arbitrator for simpler disputes to save costs.

  • Three arbitrators for complex disputes to ensure balanced decision-making.

• Appointment Process: Clearly outline the method:

  • Each party appoints one arbitrator, and the two arbitrators appoint the third.

  • The institution appoints arbitrators if parties fail to agree.

Example:

“The tribunal shall consist of three arbitrators. Each party shall appoint one arbitrator, and the two appointed arbitrators shall select the presiding arbitrator.”

7.      Arbitrator Qualifications

Arbitration allows the parties to specify the qualifications and experience they expect from the arbitrators. While leaving the criteria broad offers flexibility in selecting the most suitable arbitrators as the dispute arises, parties may choose to define certain qualifications, such as industry experience or nationality. If they do so, they should consider the following tips:

• Avoid overly restrictive criteria, which could limit the pool of potential arbitrators and make the arbitration agreement ineffective (similarly, parties should refrain from naming specific individuals);

• Ensure that the chosen criteria do not inadvertently exclude or include certain arbitrators.

It is also advisable for the appointed arbitrator to provide written confirmation that they meet the contractual qualifications, if specified, to prevent any issues with enforcement later on.

8.      Consolidation and Joinder

When parties are involved in multi-contract arrangements, they face the risk of multiple tribunals being appointed for separate arbitrations related to the same or similar set of facts. This can result in conflicting rulings and increase both costs and delays.

The key to managing multi-contract disputes effectively is to ensure consistency across the arbitration agreements in each interrelated contract and to explicitly allow for consolidation (the merging of separate arbitrations arising from the same or related contracts into one proceeding) and joinder (the inclusion of a third party in an ongoing arbitration). It is important for parties to consider that institutional rules may include specific provisions related to consolidation and joinder.

• Facilitate the efficient resolution of multi-contract disputes.

• Ensure arbitration agreements across related contracts are consistent.

• Include provisions for consolidation and joinder to address interrelated disputes and avoid conflicting decisions.

9.      Multi-tiered Clauses

Multi-tiered clauses create pathways for dispute resolution, starting with negotiation and escalating through mediation or conciliation, ultimately leading to arbitration. While many commercial parties see significant value in alternative dispute resolution (ADR), multi-tiered clauses should anticipate the possibility of a party resisting the process. By the time the dispute resolution steps are triggered, parties may have already attempted informal resolution without success. The reluctant party, often the respondent, might try to hinder progress in various ways. Therefore, the clause should be carefully crafted to include a clear timeline and specific trigger points, allowing the process to continue even without the active participation of both parties.

• Allow for dispute escalation, from negotiation to mediation, and finally arbitration.

• Draft clauses with a recalcitrant party in mind, ensuring clear timetables and progression triggers.

Example:

“Any dispute shall first be referred to mediation under [Rules]. If unresolved within [timeframe], the dispute shall be resolved by arbitration under [Institution Rules].”

SAMPLE CLAUSES

·       A Sample Clause

“Any dispute, controversy, or claim arising out of or in connection with this agreement, including its formation, interpretation, performance, breach, termination, or validity, shall be finally resolved by arbitration administered by [Institution Name] under its [Rules]. The arbitration shall be conducted by [Number] arbitrator(s) appointed in accordance with the said rules. The seat of arbitration shall be [City, Country], and the language of the arbitration shall be [Language]. The governing law of this agreement shall be [Law]. All arbitration proceedings and awards shall remain confidential. The arbitral award shall be final and binding, enforceable under the New York Convention or applicable laws.”

·       Istanbul Arbitration Centre

Parties wishing to refer to arbitration under the Istanbul Arbitration Centre Arbitration Rules, may adopt the following model arbitration clause by making the necessary modifications according to their particular circumstances, and use this as an arbitration agreement:

“Any disputes arising out of, or in connection with the present contract shall be finally settled through arbitration under the Istanbul Arbitration Centre Arbitration Rules.

The following provisions may be added to the model arbitration clause:

• The Emergency Arbitrator Rules shall not apply.

• The place of the arbitration shall be (City/Country).

• The language of the arbitration shall be (…).

• The number of the arbitrators shall be (…).

• The law applicable to the merits of the dispute shall be (…).”

·       Standard ICC Arbitration Clause

“All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”

Parties are free to adapt the clause to their particular circumstances. For instance, they may wish to stipulate the number of arbitrators, given that the ICC Arbitration Rules contain a presumption in favour of a sole arbitrator. Also, it may be desirable for them to stipulate the place and language of the arbitration and the law applicable to the merits. The ICC Arbitration Rules do not limit the parties’ free choice of the place and language of the arbitration or the law governing the contract. When adapting the clause, care must be taken to avoid any risk of ambiguity. Unclear wording in the clause will cause uncertainty and delay and can hinder or even compromise the dispute resolution process. Parties should also take account of any factors that may affect the enforceability of the clause under applicable law. These include any mandatory requirements that may exist at the place of arbitration and the expected place or places of enforcement[1].

·       For Parties Who Wish to Refer Their Disputes To SIAC Arbitration

 "Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration in Singapore in accordance with the Arbitration Rules of the Singapore International Arbitration Centre ("SIAC Rules") for the time being in force, which rules are deemed to be incorporated by reference in this clause. The Tribunal shall consist of [State an odd number, either state one or three] arbitrator(s) to be appointed by [e.g. the Chairman of theSIAC]. The language of the arbitration shall be "

[1] Standard ICC Arbitration Clauses, https://iccwbo.org/news-publications/arbitration-adr-rules-and-tools/standard-icc-arbitration-clauses-english-version/#single-hero-document