Top 10 tips for drafting arbitration agreements

Introduction

Arbitration agreements are often treated as “one-size-fits-all” precedents which are included in commercial contracts without much thought. This approach can be counterproductive and can result in increased time, cost and complexity to resolve disputes. A well-drafted arbitration agreement, taking into account the issues identified by this article, may serve to mitigate those risks.

Scope of the arbitration agreement

The scope sets out the types of disputes that can be referred to arbitration. A poorly drafted scope is a common source of disputes and may deprive the tribunal of jurisdiction over all or part of the dispute.

Three critical aspects to consider are:

• Language: Common phrases such as arising “out of”, “under” or “in connection with” all have different meanings, some broader than others;
• Carve outs: Trying to carve out certain types of disputes often results in unforeseen consequences and should be avoided wherever possible; and
• Parties: The right parties need to be party to the arbitration agreement. This can be a problem where the contractual counterparty is a newly incorporated joint venture without assets or a state owned entity. The arbitration agreement should include the party against whom any award will be enforced.

Seat of the arbitration

The seat of arbitration determines the procedural law of the arbitration. Its importance cannot be overstated: amongst other things, it determines the availability of interim remedies and rights relating to the enforcement of the award. The seat of arbitration may be different to the venue of arbitration (where the arbitration will physically take place), and the governing law of the arbitration agreement.

Most parties opt for a ‘neutral’ jurisdiction as the seat but this should not be the only consideration. Arbitral laws differ between countries and have important consequences on the efficiency of the arbitration and enforceability of an award. Recognising this, CIArb has developed the London Principles, to assist parties in choosing a ‘safe seat’ for arbitrations.

Governing law of the arbitration agreement

The arbitration agreement is a contract in its own right. Consequently, the law governing the arbitration agreement (which determines the validity and scope of the arbitration agreement) can differ from the governing law of the substantive contract.

In international contracts, performance may be in one jurisdiction while the parties are located in others; the governing law of the contract may be that of one jurisdiction while the seat of the arbitration may be another jurisdiction still. The absence of an express governing law for the arbitration agreement can lead to lengthy disputes.

Despite this, arbitration agreements often fail to specify the governing law of the arbitration agreement. We strongly recommend doing so.

Choice of rules

One of the most important decisions when drafting an arbitration agreement is whether to adopt the rules of an established arbitral institution, such as the ICC or LCIA, to govern the arbitration procedure. The main benefits of doing so is that the institution, in return for a fee, plays a key role in administering the dispute and their rules offer a well-established and predictable procedure.

If the parties wish to refer their disputes to ad hoc (un-administered) arbitration, they should consider either setting out a bespoke process, adopting existing ad hoc procedural rules (such as the UNCITRAL rules) or incorporating the rules of an institution but making clear that those provisions in which the institution plays an administrative role and receives fees for doing so will not apply. If this is not agreed prior to entry into the transaction between the parties, such options will need to be agreed between the parties. Parties should also consider using an institution as an appointing authority.

Language

The arbitration clause should identify the language of the arbitration, especially where parties are from countries with different first languages.

This is an important choice as all submissions and evidence will be presented in the agreed language during the proceedings. Selecting the language that the parties most commonly use in their communications could save significant translation and interpretation costs.

Number and appointment of arbitrators

As a general rule, where disputes are likely to be high value and complex, it is usually advisable to specify that the tribunal will consist of three arbitrators. Whereas if the dispute is likely to be low value and uncomplicated it may be more appropriate and cost effective to provide for a sole arbitrator.

In multi-party disputes, where it is unworkable for each party to select an arbitrator, parties should agree on an appointment procedure. For example, parties can agree that appointments will be made by an appointing authority.

Specifying arbitrator characteristics

Arbitration allows parties to agree upon the characteristics and experience that arbitrators are to have.

Generally, being non-specific gives parties the flexibility to nominate the most appropriate arbitrators at the time the dispute arises. But if parties wish to stipulate qualifying criteria (for instance, particular industry-sector experience or nationality), there are a few drafting tips:

• The class of potential arbitrators should not be unduly narrow, as it potentially might render the arbitration agreement inoperable (for the same reason, parties should avoid naming specific individuals); and
• The chosen criteria do not unintentionally include or exclude a class of potential arbitrators.

It is good practice for the selected arbitrator to obtain written confirmation upon appointment that the contractual criteria (where specified) are considered fulfilled, in order to avoid any later enforcement issues.

Consolidation and joinder

Parties bound by multi-contract arrangements face the risk that, when disputes arise, different tribunals may be appointed to deal with multiple arbitrations in relation to the same or similar set of facts. This can lead to conflicting decisions and add costs and delays.

The key to dealing with multi-contract disputes effectively is to ensure that the arbitration agreement in each interrelated contract is consistent and that it expressly allows for consolidation (i.e. the merger of separate arbitrations arising out of the same or interrelated contracts into a single set of proceedings) and joinder (i.e. the addition of a third party to an existing arbitration).

Parties should bear in mind that institutional rules may contain specific requirements in relation to consolidation and joinder.

Multi-tiered clauses

Multi-tiered clauses provide gateways for attempts at a negotiated resolution, allowing disputes to be gradually escalated from negotiation to mediation or conciliation and finally to arbitration.

Despite many commercial parties seeing great benefit in ADR, multi-tiered clauses should be drafted with a recalcitrant party in mind. Often by the time the dispute resolution process is invoked, the parties have already tried to informally resolve the dispute without success. The disaffected party, often the putative respondent, may seek to frustrate the process by various means. The clause should be drafted to ensure that there is a clear timetable and trigger points which can be progressed without the active participation of both parties.

Don’t overcomplicate it!

With so much to consider, it can be tempting to set out a detailed clause covering every conceivable possibility, but this can be counterproductive. It is impossible to predict every dispute that might arise. A proscriptive clause may not suit the dispute that actually eventuates or be so complicated that the parties cannot sensibly comply with it.

Instead, parties should focus on completing a thorough risk assessment of the arbitration agreement and broader dispute resolution clause at an early stage. Based on this assessment, the parties can focus on drafting an arbitration agreement that is most suited to those risks, and that is effective for any dispute that might arise. A simpler approach to drafting helps mitigate the risk of the unexpected.

Key takeaways

Ultimately, every arbitration agreement is bespoke. Parties should seek legal advice to ensure that their arbitration agreement is effective and fit for purpose. However, the guidance set out above may help to ensure that your arbitration agreement does not create more disputes than it resolves.