How to draft an Arbitration
Clause?
Source: American Arbitration Association Rules on
Arbitration.
Arbitration:
Arbitration is a legal process/technique for the resolution of
disputes outside the courts, wherein the parties to a dispute
refer it to one or more persons (the "arbitrators", "arbiters" or
"arbitral tribunal"), by whose decision (the "award") they
agree to be bound.
Drafting Arbitration Clause:
Need
Drafting clear, unambiguous clauses contributes to the efficiency
of the ADR process. For example, arbitration agreements require
a clear intent to arbitrate. It is not enough to state that “disputes
arising under the agreement shall be settled by arbitration.” While
that language indicates the parties’ intention to arbitrate and may
authorize a court to enforce the clause, it leaves many issues
unresolved. Issues such as WHEN, WHERE, HOW &
BEFORE whom a dispute will be arbitrated are frequent source
of disagreements, and if such issues are not carefully covered and
drafted then there remains no way to resolve them except to go to
court.
Common Elements of Arb.
Clause:
▶ The clause might cover all disputes that may arise, or only certain types.
▶ It could specify only arbitration – which yields a binding decision – or also
provide an opportunity for non-binding negotiation or mediation.
▶ It should state whether a panel of one or three arbitrator(s) is to be selected, and
to include the seat where the arbitration will occur.
▶ If the contract includes a general choice of law clause, it will
govern the arbitration proceeding. Its consequences should be carefully thought
through.
▶ It must incorporate the language to be used in the arbitration.
▶ The arbitration clause should be signed by all the parties.
Use of Standard Arb.
Clause
▶ It clearly indicates that parties in their Arb Clause agree to have
their
disputearbitrated by Institutional Arbitrationby applying the
designated standard Rules of Arbitration.
▶ This eliminates the need to spell out dozens of procedural matters in
the parties’ agreement. It provides for the selection of a specialized,
impartial panel. Arbitrators are selected by the parties from a
screened and trained pool of available experts.
▶ Despite the Standard Clause, parties are free to customize the basic
arbitration procedures to meet their particular needs.
Aspects to be considered while
Drafting Arbitration Clause:
1. Specifying a Method of
Selection and the Number of
Arbitrators
▶ It must clearly reflect the needs of the parties.
▶ Why would you want to have sole or a panel of three
arbitrators? (you may want high stake claim to be arbitrated by 3
arbitrators)
▶ Do you want to name the arbitrator?
▶ Why would you not like to name the arbitrator?
The appointment process can be hugely time taking process. So often
times you would want to incorporate an expeditious appointment
process, say for example within 10 or 15 days.
2. Arbitrator
Qualifications
▶ Why would you want to prescribe qualifications for
arbitrators?
▶ Do you need arbitrator to be a lawyer, or a retired judge,
accountant, architect or a cyber expert?
▶ Example:
The arbitration proceedings shall be conducted before a panel
of three neutral arbitrators, all of whom having minimum 10
years experience of arbitration practice, either as counsel in
arbitration cases or an arbitrator.
3. Arbitrator’s
Nationality
Most importantly, parties might wish to specify that the
arbitrator should or should not be a national or citizen of a
particular country. The following examples can be added to
the arbitration clause to deal with this concern.
▶ The arbitrator shall be a national of [country].
▶ The arbitrator shall not be a national of either [country A]
or [country B].
▶ The arbitrator shall not be of the nationality of either of the
parties.
4. Seat of
Arbitration
▶ Think why would you insert the name of a place/seat in the
arbitration clause?
▶ In complex disputes involving many parties belonging to different
countries, often this is the most problem creating issue.
▶ The choice of the proper place to arbitrate is most important because
the place of arbitration implies generally a choice of the applicable
procedural law, which in turn affects questions of arbitrability,
procedure, court intervention and enforcement.
▶ Seat of Arbitrationis contrasted with place of meeting
arbitration. for
Cont’d.
In specifying the seat, parties should consider
(1)the convenience of the location (e.g., availability of witnesses, local
counsel, transportation, hotels, meeting facilities, court reporters, etc.);
(2)the available pool of qualified arbitrators within the geographical area;
(3) the applicable procedural and substantive law.
Of particular importance in international cases is the applicability of a
convention providing for recognition and enforcement of arbitral
agreements and awards and the arbitration regime at the chosen site.
5.
Language
Seat of Arbitration does not automatically mean “language also chosen of the seat of
arbitration”
In matters involving multilingual parties, the arbitration agreement often specifies the
language in which the arbitration will be conducted. Preferred language is English.
You will choose any other language only after carefully considering the availability of
arbitrators/counsels in that language.
Examples:
▶ The language(s) of the arbitration shall be [specify].
▶ The arbitration shall be conducted in the language in which the contract was
written.
▶ Such arbitration clauses could also deal with selection and cost allocation of an
interpreter.
6. Governing Law
(often contentious)
It is common for parties to specify the law that will govern the contract
and/or the arbitration proceedings. Some examples follow.
“This agreement shall be governed by and interpreted in accordance
with the laws of the United Kingdom. The parties acknowledge that
this agreement involves cross border activities and transactions . The
UK Arbitration Act, 1996 shall govern the interpretation, enforcement,
and proceedings pursuant to the arbitration clause in this agreement.”
Or,
“This contract shall be governed by the laws of the state of [specify]“
7. Document
Discovery
Under some institutional rules, arbitrators are authorized to direct a
prehearing exchange of documents. The parties typically discuss such
an exchange and seek to agree on its scope. In most (but not all)
instances, arbitrators will order prompt production of limited numbers
of documents which are directly relevant to the issues involved. In
some instances, parties might want to ensure that such production will
in fact occur and thus provide for it in their arbitration clause. In doing
so, however, they should be mindful of what scope of document
production they desire. This may be difficult to decide at the outset. If
the parties address discovery in the clause, they might include time
limitations as to when all discovery should be completed and might
specify that the arbitrator shall resolve outstanding discovery issues.
8. Duration of Arbitration
Proceeding
Parties sometimes underscore their wish for an expedited result by
providing in the arbitration clause, for example, that there will be an
award within a specified number of months of the notice of intention to
arbitrate and that the arbitrator(s) must agree to the time constraints
before accepting appointment. Before adopting such language,
however, the parties should consider whether the deadline is realistic
and what would happen if the deadline were not met under
circumstances where the parties had not mutually agreed to extend it
(e.g., whether the award would be enforceable). It thus may be helpful
to allow the arbitrator to extend time limits in appropriate
circumstances.
Cont’d.
Example:
“The award shall be made within nine months of the
filing of the notice of intention to arbitrate (demand),
and the arbitrator(s) shall agree to comply with this
schedule before accepting appointment. However,
this time limit may be extended by agreement of the
parties or by the arbitrator(s) if necessary.”
9. Arbitration within
Monetary Limits
Depending what parties want, they may wish to incorporate
in the arbitration clause the upper-most range of amount to
be awarded by the arbitrators.
“Any award of the arbitrator in favour of [specify party] and
against [specify party] shall be at least [specify a amount]
but shall not exceed [specify a amount]. [Specify a party]
expressly waives any claim in excess of [specify a amount]
and agrees that its recovery shall not exceed that amount.
Any such award shall be in satisfaction of all claims by
[specify a party] against [specify a party].”
10. Fees, Expenses etc.
▶ Feesand expenses of the arbitration, including attorneys’ fees, can be
dealt with in the arbitration clause. It should be allocated equally
between the parties, except for Lawyer’s fees.
“Each party shall bear its own costs and expenses and an equal share of
the arbitrators’ and administrative fees of arbitration”
▶ For lawyer’s fees a separate clause may be negotiated
“The prevailing party shall be entitled to an award of reasonable
attorney fees”
11. Confidentiality
While the Institution Administering Arbitration and arbitrators adhere
to certain standards concerning the privacy or confidentiality of the
hearings (e.g. AAA Code of Ethics for Arbitrators in Commercial
Disputes), parties might also wish to impose limits on themselves as to
how much information regarding the dispute may be disclosed outside
the hearing. The following language might help serve this purpose.
“Except as may be required by law, neither a party nor an arbitrator
may disclose the existence, content, or results of any arbitration
hereunder without the prior written consent of both parties.”
12. Mediation-Arbitration Clause
▶ It may be inserted as a condition precedent to arbitration.
▶ It means recourse to mediation first before arbitration.
▶ It helps in narrowing down the issues. That is, small issues
could be tided over in mediation, and arbitration is then
used for major hurdles.
▶ But key thing is to be kept in mind whether you want the
same mediator to continue also as an arbitrator.
“ARBITRATION CLAUSE”
SAMPLES:
A. Sample Med-Arb Clause
“If a dispute arises from or relates to this contract or the breach
thereof, and if the dispute cannot be settled through direct
discussions, the parties agree to endeavour first to settle the dispute
by mediation administered by the Indian Institute of Arbitration under
its Commercial Mediation Procedures before resorting to arbitration.
Any unresolved controversy or claim arising from or relating to this
contract or breach thereof shall be settled by arbitration administered
by the Indian Institute of Arbitration in accordance with its
Commercial Arbitration Rules. If all parties to the dispute agree, a
mediator involved in the parties’ mediation may be asked to serve as
the arbitrator.”
B. Sample Arbitration
Clause
"Any dispute arising out of or in connection with this
contract, including any question regarding its existence,
validity or termination, shall be administered by the Indian
Council of Arbitration at New Delhi, India in accordance
with the Arbitration and Conciliation Act 1996 in force at the
commencement of the arbitration. The number of arbitrators
shall be one. This contract is governed by the Indian Contract
Act, 1872. The language for the arbitration shall be English.”
