Many parties to commercial contracts choose to include an arbitration clause, as a way of resolving any disputes that may arise between them outside the ordinary courts. Yet this clause is often written in the final moments before signing, or copied from another contract without review, and its flaws only appear when a dispute arises, by which time amending it has become difficult or impossible.
In this article, we explain the key issues to consider when drafting an arbitration clause so that it serves its intended purpose.
What is an arbitration clause?
An arbitration clause is an agreement between the parties to a contract that disputes which may arise between them in connection with that contract will be referred to an arbitral tribunal for determination, rather than to the courts. The agreement to arbitrate may take the form of a clause in the contract made before any dispute arises, or a separate agreement concluded after a dispute has arisen.
Arbitration offers several advantages, including the privacy of the proceedings, the possibility of choosing arbitrators with expertise in the subject of the dispute, and procedural flexibility that the parties can agree on. These advantages, however, do not come automatically; they depend to a large extent on the quality of the drafting.
Why does precise drafting matter?
A vague or incomplete clause may open the door to an additional dispute about the clause itself: Does it cover this disagreement or not? Who chooses the arbitrators? Where will the hearings be held, and in which language? The result may be a longer dispute rather than a shorter one, or challenges to the validity of the proceedings or of the award.
That is why the time spent drafting the clause carefully at the contracting stage may save months of disagreement later.
Essential elements of an arbitration clause
Scope of the clause
Clearly define the disputes covered by the clause. Broad wording that covers any dispute arising out of or relating to the contract, its performance, interpretation or termination reduces the likelihood of disagreement over whether a particular issue falls within the scope of arbitration.
Institutional or ad hoc arbitration
The parties may choose to have the arbitration administered by an arbitration center with established procedural rules, or agree on ad hoc arbitration in which they organize the proceedings themselves. Each option has its own considerations in terms of cost, organization and speed, and the choice is best stated expressly in the clause.
Number of arbitrators and how they are appointed
Specify whether the tribunal will consist of a sole arbitrator or three arbitrators, how they will be appointed, and what happens if one party fails to appoint its arbitrator. The absence of these details may delay the start of the arbitration.
Seat of arbitration
The seat of arbitration has legal significance beyond being the place where hearings are held, as it may determine the applicable procedural law and the authority competent to rule on certain matters relating to the arbitration and the award. It should therefore be chosen carefully.
Language of the arbitration
In contracts between parties from different countries, specifying the language of the arbitration avoids an early disagreement and affects the choice of arbitrators and translation costs.
Governing law
It is useful to distinguish between the law governing the substance of the contract and the rules governing the arbitral procedure. Stating each of them expressly prevents conflicting interpretations.
Common mistakes in arbitration clauses
- Contradictory clauses: for example, a contract that provides for arbitration in one clause and for the jurisdiction of a particular court in another, without clarifying how the two relate.
- Referring to an imprecisely identified body: such as naming an arbitration center incorrectly or naming one that does not exist.
- Omitting the mechanism for appointing arbitrators when the parties cannot agree.
- Copying a clause word for word from another contract without considering the different nature of the transaction or its parties.
- Overlooking related contracts: for instance, several contracts within a single transaction, each with a different dispute resolution method, which may lead to multiple proceedings.
When is arbitration appropriate?
Arbitration is not the best option in every case. It is often suitable for commercial transactions of significant value, transactions requiring specialized technical expertise, transactions in which the parties value confidentiality, or those involving parties from different countries. In simple or low-value disputes, its cost may be disproportionate to the value of the dispute.
The decision to include an arbitration clause should therefore be made after studying the nature of the transaction, its parties and the expected risks, rather than automatically.
Reviewing the clause before signing
Before signing any contract that contains an arbitration clause, ask yourself:
- Does the clause cover all types of potential disputes?
- Are the chosen institution or rules clear and specific?
- Is the method of appointing arbitrators clear, and what happens if the parties disagree?
- Are the seat, the language and the governing law specified?
- Is the clause consistent with the rest of the contract and with related contracts?
How can we help?
At Abu Hussien Law Firm, we advise on arbitration agreements and clauses, draft and review them, and represent clients in arbitral disputes. You can learn more about our arbitration services.
Conclusion
A good arbitration clause looks simple on paper, but it is the product of thinking ahead about potential dispute scenarios. Investing in careful drafting at the contracting stage is one of the best forms of legal prevention. If you are about to conclude a contract or would like an existing arbitration clause reviewed, you can request a consultation with our team.