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Legal analysis by Harneys lawyers

​Drafting the perfect arbitration clause

Author:
Publication Date:
11 April 2017

A reference to the “perfect arbitration clause” is always likely to be a little controversial. It suggests that somewhere there lies a precedent for a perfect clause, waiting to be discovered in some cave like the Dead Sea scrolls, or the tablets handed down by God on Mount Sinai. Sadly, no such precedent exists. In the same way that all commercial contracts differ, so too will the optimal arbitration clause for any particular situation. In the immortal words of Arthur Ashe “success is a journey, not a destination”, and that is true of drafting arbitration clauses as much as anything else. With that in mind, let’s try and recount the main steps which normally need to be taken on that particular journey.

1.  Is arbitration appropriate?

When considering arbitration always remember that there are certain jurisdictions which prohibit the use of arbitration clauses in certain circumstances, particularly in employment and consumer contracts. It is also worth noting that certain matters are, by their nature, not readily suitable for arbitration, and fall outside of key international treaties in relation to cross border arbitration. In particular Article V of the New York Convention contains a broad exclusion to enforceability where “[t]he subject matter of the difference is not capable of settlement by arbitration under the law of that country”.

2.  Arbitration or expert determination

It is worth considering whether all issues which might arise between the parties should necessarily be resolved at an arbitration hearing, or whether in some cases a discrete issue might be resolved by an expert determination. Expert determinations are similar to arbitration in that they bind the parties to a particular finding of fact, but distinct from arbitration in that they usually resolve a single issue and don’t make a final determination of claims. A common but effective use of experts often relates to valuations in the sale of a business or other assets. 

3.  Institutional arbitration or ad hoc

The parties should consider whether they want to arbitrate under the auspices of a particular institution or whether any arbitration should be done on an ad hoc basis. Again, the arguments are well rehearsed – institutional arbitration tends to be more formalised, slower and more expensive. Ad hoc arbitration tends to be cheaper, more flexible and better placed to fill unusual situations, but often suffers from lack of a “grown up” supervising the process, particularly in the early stages. Also, as a generalisation, my experience has tended to be that people who are more comfortable with arbitration as a concept tend to be more likely to use ad hoc arbitration, and those who are less familiar prefer the comfort of an institutional framework.

4.  Size of the tribunal

Normally an arbitration clause must make a straight decision between a sole arbitrator, or a panel of three (one appointed by each party plus an umpire). A sole arbitrator is usually quicker, cheaper and more efficient. But it exposes the parties to a single point of view, and may make the appointment process more contentious. 

5.  Composition of tribunal – lawyers or experts

One of the great benefits of arbitration is the ability to specify that the arbitrators must have different qualifications which provide the necessary technical expertise on the relevant subject matter. These qualifications need not necessarily be professional – for example fluency in more than one language may also be advantageous in specific international commercial disputes.

6.  Choice of law issues

Every commercial lawyer knows that no good commercial contract should ever fail to contain an express governing law clause. That governing law will determine the merits of any claim, but not necessarily the procedure of the claims process; that procedure will be determined by the law of the relevant forum. What far too few lawyers (much less their clients) appreciate is the significance of the laws which apply to the arbitration in cases where the forum and choice of governing law is not the same. In most conflict of laws systems, the procedural rules are determined by the “seat” of the arbitration. So, an unprepared lawyer may assume that the restrictions on applying to set aside awards found in the UK’s Arbitration Act 1996 apply by virtue of the governing law, but they would discover that the more liberal regime in the BVI’s Arbitration Act 2013 actually applies.

7.  Appeals and applications to set aside

Depending upon the seat of the arbitration, the parties may be able to restrict or enable the ability to appeal, challenge or set aside the award of an arbitrator. The BVI’s Arbitration Act 2013 states that an award may only be challenged for serious irregularity, or appealed on a point of law, if the parties expressly agree to do so. Under English law the position is reversed – the parties are entitled to appeal on a point of law or to set aside on the basis of irregularity unless they have agreed to exclude that right. In either jurisdiction the parties have the freedom to choose, but the default position if they make no choice is different in each case. 

8.  Interim relief

The parties may wish to consider whether the availability to seek interim relief in relation to any dispute is desirable. It has become vogue in recent times in certain jurisdictions (Singapore being a notable example) to confer upon arbitrators the power to grant injunctive or interim relief. There is some healthy scepticism about the value of this – injunctive relief from the court carries with it sanction in the form of contempt of court for violating the order. Breach of an interim order by an arbitrator carries with it the risk that the arbitrator will be cross, and therefore more likely to rule against the party in breach, but not a great deal more than that – and certainly nothing which might compel a third party to act or refrain from acting in a particular way.

9.  Language

A good arbitration clause will specify the language in which the arbitration should be conducted to avoid disputes upon the issue. 

10. Procedure

If the parties agree on institutional arbitration, then the arbitration rules of that institution will normally be. If the parties choose ad hoc arbitration they may want to adopt a standardised form of arbitration rules such as the UNCITRAL Model Rules or the London Common Law and Commercial Bar Association Arbitration Rules

Summary

There are a lot of things to think about when trying to draft your perfect clause. But lawyers and their clients should try and moderate their stress levels when drafting arbitration clauses. In this field as in much of life, the great should not become the enemy of the good. Far better that parties utilise simple but effective arbitration clauses than that they fail to reach agreement while striving for the “perfect clause”. Like most quests for perfection, it works better as an aspiration than a requirement.

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