Written by Team Farallon
Hastily incorporated arbitration agreements can prove counterproductive, amplifying the time, cost, and intricacy involved in resolving disputes. However, a well-crafted arbitration agreement holds the potential to mitigate these risks.
The foundation of any arbitration agreement lies in the mutual consent of all parties involved, selecting arbitration as the preferred means of dispute resolution over state courts and other alternatives. This consent serves as the bedrock of arbitration. The arbitration agreement also cannot breach principles of contract law, such as fraud, illegality, or lack of capacity, or else it may render an arbitration agreement invalid. Furthermore, the New York Convention and the IAA outline certain non-arbitrable categories of issues, which can also invalidate an arbitration agreement.
To evade protracted debates over an agreement’s validity, it is imperative that the terms be meticulously drafted and documented. Poorly constructed arbitration clauses can prove unenforceable, burdening parties with unnecessary expenses and delays. By considering these guidelines below, contract drafters should be able to ensure that their arbitration clauses are effective and adapted to their needs.
The first decision parties face when drafting an arbitration clause is whether to choose institutional or ad hoc arbitration. In institutional arbitration, an arbitral institution assists in managing the proceedings by handling practical aspects and providing services like scheduling hearings, managing communication, appointing substitute arbitrators, adjudicating challenges against arbitrators, and reviewing the final award. However, the institution does not make determinations on the merits of the dispute; that responsibility lies with the arbitrators.
On the other hand, in ad hoc arbitration, the parties themselves, along with the appointed arbitrators, take full responsibility for managing the proceedings. To facilitate the process, parties can select a specific set of arbitration rules tailored for ad hoc arbitration. Although no arbitral institution oversees the proceedings, it is still necessary to designate a neutral third party or appointing authority to select arbitrators and handle any potential vacancies.
Parties without much experience in international arbitration may find institutional arbitration beneficial. If opting for administered arbitration, it is recommended to choose a reputable institution with a track record of handling international cases, such as the ICC, SIAC, or HKIAC. These well-established institutions have the capability to administer arbitrations worldwide, regardless of their headquarters’ location.
It is essential for parties to carefully select the appropriate arbitration rules to govern the proceedings. In the case of institutional arbitration, it is important to align the chosen rules with the selected arbitral institution. For ad hoc arbitration, opting for non-administered rules such as UNCITRAL is recommended. In either scenario, it is crucial to designate an arbitral institution or a neutral entity as the appointing authority.
Using the model clause provided by the specific institution can serve as a helpful starting point. It is important to refrain from removing essential elements and ensure that the resulting arbitration agreement is valid, enforceable, and effective. Clearly specify that arbitration is the exclusive method for resolving disputes and accurately reference the institution and rule names. Any additional language should be in line with the selected rules.
For a suitable model clause for institutional arbitration, consulting the institution’s website is advisable.
The arbitration clause’s scope pertains to the range and nature of disputes that are eligible for arbitration. It is advisable to define the scope of an arbitration clause in a comprehensive manner, encompassing not only all disputes that “arise out of” the contract but also those “related to” or “connected with” the contract. If the language used is less inclusive, it may give rise to arguments about whether a particular dispute falls within the purview of arbitration.
It is important for parties to understand that even when exclusions are carefully drafted, disputes may still arise regarding whether a particular issue falls under arbitration. A claim might involve some matters that fall within the scope of the arbitration clause while others do not. To ensure a broad scope for their arbitration clause, parties should consider utilizing the model clause associated with the selected arbitration rules.
For example, here is some sample language from the SIAC Model Clause which you can choose to incorporate in your documents:
“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 administered by the Singapore International Arbitration Centre (“SIAC”) 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 selection of the place or seat of arbitration is an important decision in arbitration proceedings. Several practical factors need to be considered, including neutrality, availability of hearing facilities, proximity to witnesses and evidence, familiarity with language and culture, and the willingness of qualified arbitrators to participate. The chosen place of arbitration can also influence the profile of the arbitrators involved.
While the place of arbitration does not determine the governing law of the contract or the merits of the dispute, it does determine the arbitration law (lex arbitri) that governs procedural aspects of the arbitration, such as arbitrators’ powers and judicial oversight.
As a general rule, it is advisable to choose a jurisdiction as the place of arbitration that is a party to the New York Convention, has supportive arbitration laws, and courts that are impartial and supportive of the arbitral process.
If the arbitration clause does not specify the place of arbitration, it is still effective but not desirable. In such cases, the arbitral institution or arbitrators will have to choose a place of arbitration if the parties cannot agree after a dispute arises. However, in ad hoc arbitration, difficulties may arise if arbitrators cannot be appointed and no place of arbitration is selected, potentially preventing the arbitration from proceeding unless courts in some country are willing to assist. Therefore, parties should not leave this critical decision to others.
Recommended clause to incorporate:
“The seat of the arbitration shall be [city, country].”
Parties should indicate whether they want one or three arbitrators, preferably an odd number, as it can affect various aspects of the arbitration process.
Having a three-member tribunal generally leads to longer and more expensive proceedings compared to a sole arbitrator. However, a three-member tribunal may be better suited to handle complex factual and legal issues and can reduce the risk of unfair outcomes. Additionally, parties may prefer the increased control over the process that comes with each party being able to select an arbitrator.
If the parties fail to specify the number of arbitrators or cannot agree on it when a dispute arises, the decision is typically made by the arbitral institution (if one exists) based on factors such as the amount in dispute and the perceived complexity of the case. In ad hoc arbitration, the selected arbitration rules may indicate the number of arbitrators to be appointed, but if such rules are not chosen, it becomes particularly important to include the number of arbitrators in the arbitration clause itself.
While some parties may intentionally remain silent on the number of arbitrators, hoping to decide later when a dispute occurs, this approach has both advantages and disadvantages. On the one hand, it allows for a more informed decision after understanding the nature of the dispute. On the other hand, if the parties disagree on the number of arbitrators, especially in ad hoc arbitration, it can lead to delays in the proceedings. Overall, it is advisable to specify the number of arbitrators in advance in the arbitration clause to avoid potential complications.
Recommended clause to incorporate:
“There shall be [one or three] arbitrator[s].”
Where the parties have different languages or the shared language differs from the place of arbitration, the parties should consider the language of the contract, related documentation, and the impact of their language choice on the availability of qualified arbitrators and legal counsel.
If the arbitration clause does not mention a language, the arbitrators will determine it, likely based on the language used in the contract or the parties’ correspondence. However, leaving this decision to the arbitrators can result in unnecessary costs and delays.
While some may consider including multiple languages for arbitration, it is advised to carefully assess the feasibility. Conducting arbitration in multiple languages can pose challenges, such as finding arbitrators proficient in both languages and the added costs and delays of translation and interpretation. One alternative is to specify one language for arbitration but allow the submission of documents in another language without translation.
Recommended clause to incorporate:
“The language of the arbitration shall be […].”
In international transactions, it is crucial for parties to specify the governing law for their contract and any future disputes. The choice of substantive law should be clearly stated in a separate clause or in a clause that combines both arbitration and governing law, making it clear that the clause serves a dual purpose. This is because issues can arise under the substantive law during contract performance that are independent of any arbitration dispute.
It’s important to note that choosing the substantive law does not automatically determine the procedural or arbitration law. By default, the procedural or arbitration law is usually based on the place of arbitration unless the parties agree otherwise. However, it is generally not advisable to deviate from the default procedural or arbitration law.
Recommended clause to incorporate:
“This contract is governed by the laws of _________________.”
In some cases, parties are bound by multiple contracts, and there is a risk of appointing different tribunals to handle arbitrations related to the same or similar facts. This can result in conflicting decisions, increased costs, and delays. To effectively manage disputes arising from multi-contract arrangements, it is crucial to ensure that the arbitration agreements in each related contract are consistent and explicitly allow for consolidation and joinder. Institutional rules may have specific requirements regarding consolidation and joinder.
It is important not to overly complicate the arbitration clause by trying to anticipate every potential dispute. A detailed clause may not be suitable for the actual dispute that arises or may be too complex to follow. Instead, parties should conduct a thorough risk assessment of the arbitration agreement and dispute resolution clause early on. Based on this assessment, they can draft an arbitration agreement that addresses the specific risks and is effective for any potential dispute. A simpler approach to drafting helps reduce the risk of unexpected complications.
Ultimately, every arbitration agreement is unique, and parties should seek legal advice to ensure its effectiveness and suitability. However, the guidance provided above can help ensure that the arbitration agreement does not create more disputes than it resolves.
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