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Thinking ahead is key

In this reading we consider the best practice method for drafting arbitration agreements.

The drafting of an appropriate arbitration agreement will typically take place when the underlying contract has been negotiated. Careful thought needs to be given to the contents of the arbitration clause. Unfortunately, in many instances, the commercial contracting parties’ in-house lawyer or General Counsel will choose to incorporate “boilerplate” arbitration clauses, which may or may not be an institutional model clause and which often do not consider the particular circumstances of the contract that has just been negotiated and the relationship between the parties. It is best good practice to agree as much as possible at the time the arbitration agreement is being drafted and before a dispute arises. Thinking ahead is key.

Consider what sort of arbitral process the company/client wants and how best that may be achieved in the wording of the agreement. You should consider not only what should be included in the arbitration agreement, but also the precise form the arbitration should take and whether it should be combined with any other form of alternative dispute resolution (ADR).

Some of the initial considerations are: • Is arbitration the most suitable form of dispute resolution? You should consider the nature of the contract. • Is pre-arbitration ADR, such as mediation, desirable? If so, should there be a hybrid or multi-tiered resolution process? • Do the parties want to refer all disputes arising out of the contract to arbitration or only certain types of disputes? • Where do the parties want the seat of the arbitration to be? This is important because the seat of arbitration will also mean that the laws of that jurisdiction will apply to the arbitration’s procedure and will cover the support and assistance that the national court can give to the arbitral process (lex arbitri). • Do the parties want the arbitration to be ad hoc or conducted under institutional rules? • How many arbitrators do the parties want to appoint? Three arbitrators rather than one will increase the cost and usually mean that diaries are harder to co-ordinate. • Who will appoint the arbitrators – the parties or an independent body? What happens if the parties cannot agree? There should be a fall-back position. • In what language do the parties want the arbitration proceedings to be conducted? • How many parties are likely to be involved? If there are more than two, then a multi-party arbitration clause may be necessary. In multi-party scenarios, consideration must be given to whether the tribunal should be provided with a specific power to consolidate connected arbitrations.

The wording of the arbitration agreement must be such as to fulfil the intentions of the parties. Given that parties will generally wish for any dispute between them to be resolved by arbitration, the agreement should be drafted to ensure that, in the event of a dispute, arbitration is a right for each of party as well as an obligation. Ideally, the wording should also cover all disputes and should avoid setting out categories of disputes.

What is a “dispute”? As to how a dispute is defined or described words such as “claims”, “differences” and “disputes” have each been held to carry with them a wide meaning and jurisdiction. The relationship between the dispute and contract is important. There was a time when much legal discussion took place as to the use of words such as “under the contract”, “arising out of the contract”, “in connection with the contract” and “in relation to/in respect of the contract”. There is now authority that a broad interpretation of such words should be given: Fiona Trust and Holding Corporation, The Yuri Privalov [2007] EWCA Civ 20.

Contents of the arbitration agreement It is generally good practice to select a standard form of clause, which will usually be from an arbitral institution (such as Singapore International Arbitration Centre) or an international authority (such as UNCITRAL). However, it is prudent to supplement the words of a model clause by including provisions as to: • the legal place or seat of the arbitration • the law governing the substantive dispute (if not addressed in the main contract) • the law governing the arbitration agreement, and • the law governing the arbitral proceedings (the lex arbitri), if it is not the law of the seat. If the above issues are not addressed, then in the event of disagreement by the parties these issues will be resolved by the arbitral institution, the arbitral tribunal or a court. The following should also be included: • a clear wording that states that any and all disputes between the parties shall be resolved by arbitration • the number or arbitrators (generally 3) • provisions as to the establishment of the arbitral tribunal • whether the arbitration will be ad hoc or institutional • the procedure to be adopted if a vacancy in the tribunal needs to be filled during the course of the arbitration • default clauses to address the failure or refusal of a party to take part in arbitration and to ensure that such a course does not frustrate the arbitration • the language of the arbitration, and • the provision of “multi-tier dispute resolution” that requires the parties to engage in a nonbinding ADR process such as mediation.

Where ad hoc arbitration is chosen or where there is a wish by the parties to deviate from some aspects of the institutional rules that they have adopted, there will be a need to cover additional procedural issues within the agreement. The parties may choose to give particular powers to the arbitral tribunal that would not usually be available under the law governing the arbitration or under the relevant institutional rules, for example, a power to order a party to provide security in respect of the amount in dispute. Even where parties have agreed to arbitration in an arbitration clause under particular institutional rules, when a dispute actually arises, the parties may agree to a different approach. As such, parties may choose to move from institutional to ad hoc arbitration or to arbitration under different rules. In such a case, a new agreement need to be made and where a dispute has arisen, it will be by way of a submission agreement.

Additional considerations for a submission agreement Where a submission agreement is to be used because a dispute already exists, there are practical considerations to be addressed that are distinct from those that arise when an arbitration agreement is drawn up. Once the parties are actually in dispute, be mindful that there will often be animosity or hostility between them, the parties’ respective interests are likely to conflict, and all parties involved will know the nature of the dispute that has arisen. As such, although a submission agreement will contain most of the features of an arbitration agreement, it is particularly important to include within it a definition or description of the dispute(s) that are to be arbitrated. It will also usually be sensible to include more detailed procedural arrangements for the arbitration itself, such as: • arrangements for production of documents • exchange of submissions and evidence • proposed timetable, and • other features that have by that stage become apparent, such as the need for a hearing. It will depend on the circumstances as to whether such issues should be addressed within the submission agreement or in a separate document prepared in conjunction with the arbitral tribunal itself, once that has been convened.

© College of Law
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International Arbitration: Frameworks and Drafting an Arbitration Agreement

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