The consent of the parties to arbitrate is the cornerstone of arbitration. It predominantly takes the form of an arbitration clause agreed upon by the parties in a contract. Hence the importance of making sure that arbitration clauses are drafted carefully so that they produce their intended effect and allow the parties to resolve disputes efficiently without unnecessary delays. This article offers practical guidance on drafting such clauses, and while it is not exhaustive, it identifies certain key points to consider.
Once the parties have decided that arbitration is appropriate for their specific needs, the clause should deal with the following aspects:
- Clear intent to arbitrate: the clause should encapsulate the parties’ unequivocable intention to go to arbitration. For instance, clauses referring to both litigation before national courts and arbitration should be avoided as they would render the parties’ intention to arbitrate ambiguous.
- Clear scope of the disputes for arbitration: the clause should define the scope of the disputes to be submitted to arbitration. In most cases, the desired scope is broad, encompassing “all disputes arising out of or in connection with” the parties’ contract.
- Choice of institutional or ad hoc arbitration: the parties could agree to an arbitral institution administering the proceedings (institutional arbitration as opposed to ad hoc arbitration which is conducted without the support of an arbitral institution). Opting for ad hoc arbitration should be considered carefully; while it could appear less costly in principle, the absence of an institution to intervene in case of procedural deadlocks could cause delays and unexpected costs. In case of institutional arbitration the name of the selected institution should be mentioned in the clause, together with the institution’s applicable procedural rules. Examples of frequently used institutions are, of course, the International Chamber of Commerce (ICC) in Paris, the London Court of International Arbitration (LCIA), the International Centre for Dispute Resolution (ICDR), etc.
- Choice of seat: the clause should specify the seat of the arbitration, which is a crucial element as it determines the place where annulment proceedings could take place against the future award, potentially jeopardizing the enforceability of the award if they are successful. For that, parties should make sure that the seat they select provides for arbitration-friendly legislation. Frequent choices therefore include Paris, London, Stockholm, Singapore, Hong-Kong, New York etc.
- Appointment of arbitrator(s): the parties could agree to have their disputes decided by one or more arbitrators, usually three. The clause may include (without overdoing it to allow for some flexibility) any specific criteria that the arbitrators should fulfil in terms for instance of experience in a specific industry sector. Also, the appointment mechanism should be clearly set out, either by reference to the applicable institutional rules or as agreed between the parties (particularly in cases of ad hoc proceedings or multi-party disputes).
- Choice of language of the proceedings: the arbitration clause should specify the language in which any arbitration should be conducted (e.g. English, French, Spanish, etc.), and in some cases it might be convenient to even deal with translation-related specific requirements that the parties might have already identified.
There can be other elements the arbitration clause could deal with as well. For instance, in some cases it might be advisable for the arbitration clause to provide for express confidentiality obligations, as confidentiality is not always guaranteed under the applicable rules of arbitration, or provide for express powers of the tribunal to award interim measures. Careful consideration must also be given in presence of multiple parties and multiple contracts as inconsistent arbitration clauses may lead to delay and multiple parallel proceedings.
The above gives a flavor of what needs to be addressed when drafting arbitration clauses. Their assessment should not be left to the last minute of the negotiations. They are just as important as any other clauses of your contract.
Authored by Melissa Ordonez and Merlin Papadhopulli.
This article was originally published in the Legal Industry Review.