Drafting optimal and enforceable arbitration clauses
Arbitration clauses – and other dispute resolution clauses – are sometimes referred to as “champagne clauses” because they are often inserted in a contract just before deal completion. These clauses are frequently copied from other contracts with little or no thought as to their suitability for the contract in question, enforceability, or whether the agreed dispute resolution process is in the parties’ best interest – given the particularities of the transaction in question. When negotiating and drafting a dispute resolution clause, it is important to consider legal and strategic practicalities, suitability, content, and enforceability, and obtain legal advice on the content of the dispute resolution clause to protect your position should a dispute arise further down the road.
Parties should work with their legal counsel to ensure the arbitration clause satisfies their business needs, is legally enforceable, and optimises their position in the event of future disputes.
Tailoring the process
Flexibility is a key benefit of arbitration; parties can tailor the dispute resolution process to their specific needs. Yet parties often fail to take full advantage of bespoke processes, opting instead for boilerplate provisions used in other agreements without considering their specific circumstances. Conversely, other parties tailor the process to such an extent that they end up with a clause that is so specific that it is entirely impractical or worse, unenforceable. To take full advantage of the flexibility afforded by arbitration, carefully consider what disputes are most likely to arise in the future, and how best to resolve them. These considerations include which set of arbitration rules or institution to employ, the arbitrator selection process, and the laws that will govern the different aspects of the contract.
To take full advantage of arbitration’s benefits, carefully consider the likely disputes and how best to resolve them.
Institutional vs ad hoc arbitration
First, consider the rules you want to govern your arbitration and whether to use an arbitral institution. Tried and tested arbitral rules can make the process proceed smoothly and cost effectively. However, a given set of arbitration rules may also limit your procedural options. For example, rules differ on when and how expedited procedures can be used by the parties or whether summary dismissal is available for non-meritorious claims.
Some rules are created by specific arbitral institutions, such as the ICC, LCIA, ICDR, SIAC or DIAC. Generally, the use of those rules means that the institution will provide varying levels of administrative support at different costs. Some rules, like the UNCITRAL Arbitration Rules, are not tied to a particular arbitral institution, and the parties are responsible for all administrative tasks unless they agree to pay an institution specifically to administer their proceedings.
In our experience, the benefits of using an institution and that institution’s rules generally outweigh any loss in procedural flexibility gained through ad hoc arbitration. If you opt for an institutional arbitration, it is advisable to use the institution’s model arbitration clause as a starting point. Based on the advice of counsel, this can then be adjusted to fit the particulars of the contract, parties, and relevant circumstances.
Tried and tested arbitral rules can increase procedural efficiency and enhance the cost effectiveness of the proceedings.
Selecting your arbitrator
Second, the ability to select one’s adjudicator is a major benefit of arbitration. Arbitration clauses can specify that the given arbitrator has certain qualifications such as industry expertise, technical certifications, or the ability to speak a certain language or be qualified in a particular legal system.
However, be careful to ensure that any list of arbitrator qualifications does not overly narrow the pool of potential arbitrators to the point that you will have difficulty finding an arbitrator with sufficient availability to prioritise your case. Also check that any arbitration rules you adopt do not conflict with the arbitrator selection process specified in your arbitration agreement.
Three specific choices of law
Finally, be sure to specify three specific choices of law:
Law of the contract – This is the substantive law that will govern the obligations between the parties. English law is often used in international contracts, even between non-English companies, because it affords a high level of certainty and predictability and is viewed as business friendly.
Seat of arbitration – The “seat” is the jurisdiction whose laws and courts will oversee the procedural aspects of your arbitration. The law of the seat fills in any gaps in your arbitration agreement and can have wide-ranging impacts on issues such as the validity of the arbitration clause, whether your dispute can be settled by arbitration or must go to court, what types of interim relief are available to you, and the level of review of any final award in your proceedings. For example, an award in an English-seated arbitration can potentially be set aside if the arbitrator incorrectly decides an issue of English law.
In most other jurisdictions there is no court review of the arbitrator’s legal conclusions. If an award is challenged in France for lack of jurisdiction due to corruption, the court may conduct a de novo review of the corruption allegations; courts in certain other jurisdictions may conduct a less detailed review of the arbitrator’s findings.
Law governing the arbitration clause – If not specified in your clause, different courts interpreting your agreement could default to different laws. For example, French courts view the choice of “seat” as the strongest evidence of the parties’ agreement that a given set of laws should be used to determine the effectiveness of their arbitration clause. English courts, on the other hand, view the choice of substantive law in the contract as the best evidence of the parties’ choice of the law applicable to the arbitration clause.
