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Errors to avoid in drafting arbitration clauses

This article explains what a "pathological clause" refers to and common mistakes made when parties make an agreement.

The term “pathological clause” refers to an arbitration clause that has been so poorly drafted as to be potentially invalid and, therefore, ineffective. Some of the common mistakes that parties often make include the following: • absence of positive agreement to arbitrate • equivocation as to whether binding arbitration is intended (such as “Any dispute of whatsoever nature … may be referred to arbitration”) • in the case of multi-tiered clauses, lack of clarity as to when an ADR stage begins and ends • naming a specific person as an arbitrator who is since retired, deceased or refuses to act • drafting an incomplete clause which makes access to justice difficult • naming a non-existent arbitral institution that does not allow an actual institution to be identified from the wording used, and • providing for conflicting or unclear procedures.

Some examples of pathological clauses include: • “English law: Arbitration, if any, London according ICC Rules” – this clause does not appear to make arbitration mandatory. • “All disputes arising in connection with the present agreement shall be submitted in the first instance to arbitration. The arbitrator shall be a well-known Chamber of Commerce (like the ICC) designated by mutual agreement between both parties” – this clause was considered in Arab-African Energy Corp Ltd v Olieprodukten Nederland BV [1983] 2 Lloyd’s Rep 419. The obvious problem with this clause and, in particular the phrase “if any”, is that it does not impose an unequivocal obligation to arbitrate disputes. A claimant could argue that it was entitled to commence proceedings in court, rather than arbitrating. Alternatively, a respondent to arbitral proceedings could argue that its express agreement was required before any arbitration could be commenced pursuant to the clause. Such satellite disputes increase the risk of court intervention, and also increase the costs and delay involved in arbitrating a dispute. The lesson from this is to use clear and mandatory language that imposes a contractual obligation to arbitrate. • “Arbitration at local chamber of commerce” – this clause fails to identify what the ‘local’ chamber of commerce is. Does it mean local to the parties or their lawyers, local to the subject matter of the contract, or local to the dispute? Any party wishing to commence arbitration pursuant to the clause would be uncertain as to where and how to commence arbitration. The lesson is that both arbitral seat and institution (if any) should be identified clearly.

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International Arbitration: Frameworks and Drafting an Arbitration Agreement

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