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Drafting an arbitration clause

This guide was last updated in August 2011.

Arbitration is a system of formal dispute resolution by one or more impartial persons, known as arbitrators, for final and binding determination. Arbitrators may hear disputes as a sole arbitrator or on a panel of three arbitrators, known as an arbitral tribunal. The arbitral tribunal can be made up of legal and/or industry experts of the parties' own choosing, using procedures which they can influence. Arbitration is a private and, to a greater or lesser degree, confidential process and can provide for the quick, practical and economical settlement of cross-border disputes.

This guide covers some of the main points to be taken into account when drafting an arbitration clause at main contract stage, either as clauses within the main contract or in a separate document, and sets out how arbitration will work in a particular case. It assumes that it will be used at the main contract drafting stage – that is, before any dispute has arisen – but the issues covered are also relevant to the negotiation of arbitration agreements after a dispute has arisen and to review of arbitration agreements that bind parties who are involved in a dispute.

Seat of arbitration

The clause should specify the seat, or place, of the arbitration. The seat of the arbitration will determine the procedural rules which govern the arbitration. For example, if the seat is Paris then aspects such as without prejudice and disclosure will be governed by civil law principles and may be different from the position in a common law jurisdiction such as England.

When thinking about what location to choose, consider how supportive of the process the national courts at the seat may be. You will need to consider enforcement, and whether the seat is in a country that is party to an international convention such as the New York Convention. Bear in mind that the New York Convention enforces awards by reference to the seat of the arbitration, not the country that the parties come from – the Republic of Yemen, for example, is not a signatory so an arbitration award made in Yemen is not enforceable under the New York Convention, but a Yemeni company can enforce an award under the New York Convention made in Paris.

If the seat is abroad, you will need to seek advice from a local lawyer.

The seat of arbitration does not dictate the physical location of the arbitration hearings. Hearings often take place at the seat of the arbitration but this is not always the case.

Number of arbitrators

An arbitral tribunal can have one or three arbitrators. Parties should consider whether the value of the contract and of any potential disputes justifies the selection of three arbitrators, which will be more expensive. Coordinating space in three arbitrators' diaries will also take more time, which will be bad news if you want a speedy resolution to your dispute.

The parties may agree not to specify the number in advance and to decide in accordance with the size and complexity of the dispute if one arises. The disadvantage of this is that proceedings may be delayed if the parties disagree on the number of arbitrators once relations have broken down. If institutional arbitration is used, the institution will decide the number of arbitrators if this is not specified in the arbitration agreement.

Language of arbitration

Specifying the language that will be used up front may save a considerable amount in translators' fees. If the language is not specified, the arbitrators get to choose. The result may not be what you would expect.

Institutional or ad hoc

Parties should consider whether they want their arbitration to be administered and supervised by a recognised arbitral institution or whether they want an ad hoc procedure. If you use an ad hoc procedure you can still use a set of institutional rules or agree your own rules and procedures.

An arbitral institution can help with the selecting and replacing of arbitrators, organising hearings and handling communications between the parties and the arbitrators - although of course this will come with a fee. Under an ad hoc arbitration the parties are able to create their own rules, but this requires a spirit of cooperation. Cost savings can disappear if this is lacking.

For more information about the differences between institutional and ad hoc arbitration, please see our separate Out-Law Guide.

Governing law

This is the law governing the subject of the dispute, sometimes termed the substantive law or the law of the main contract. The parties should decide on the law they wish to apply to any disputes that arise and the tribunal will apply that law to the merits of the dispute.

If this is not specified, it may be a source of substantial dispute in itself further down the line if relations between the parties sour.

Governing law of arbitration agreement

Usually, but not necessarily, this will be the same as the law of the substantive contract. Often the arbitration agreement will consist of a clause or clauses within the substantive contract, and will be governed by the law specified within that contract. However, it may be that a different law is specified as the law governing the arbitration agreement.

Scope of disputes covered

The arbitration clause should be wide enough to encompass all possible disputes and claims – this includes damages claims as well as breach of contract. The words 'disputes relating to' or 'arising in connection with' the contract are wider than disputes 'arising under' the contract, which a court may interpret as covering only contractual claims.

There must be clear, unambiguous and mandatory submission of disputes to arbitration. For example, a clause that provides that 'disputes may be referred to arbitration' might not be effective, depending on the approach of the local courts, to prevent a party from taking the dispute to court.

Selecting and replacing arbitrators

If the parties agree to have a tribunal of three arbitrators, the usual process is for each side to nominate an arbitrator and for those two arbitrators then to nominate a presiding arbitrator. In the case of an institutional arbitration, the chosen institution may nominate the presiding arbitrator. If there are more than two parties to the arbitration agreement, the drafting may need to be adjusted (see 'Multiple parties' below).

It is useful to include the default mechanism which will apply if the parties fail to agree. For example, if the parties are to agree on a sole arbitrator you should consider adding a provision that if they cannot agree within a defined timescale the relevant institution or a third party will appoint the arbitrator.

The main institutional rules provide default mechanisms for selecting and replacing arbitrators. Depending on the rules used, if any, the parties will have greater or lesser influence in the selection process.

If it is important that the arbitrator or arbitrators have particular qualifications or experience, consider specifying this. In doing so, bear in mind that you may limit the number of potential arbitrators.

Multiple parties

Some thought needs to be given when there are more than two parties to the contract - for example, in relation to the mechanism for nominating arbitrators. In this case the clause may provide that if a dispute arises and more than two of the parties are in dispute, then one arbitrator may be chosen by the party or parties making the claim and one arbitrator by the party or parties on the other side. The presiding arbitrator can then be chosen by these two arbitrators in the usual way.

Mandatory rules

Mandatory rules are rules that cannot be contracted out of. Any applicable institutional rules can only amend or override non-mandatory rules. An example of a mandatory rule is that in Turkey it is mandatory that anyone signing an arbitration agreement on behalf of someone who is Turkish must have a special power of attorney.

Sovereign immunity

Sovereign, or state, immunity is the immunity of a state from being sued in the courts of another state. If you are contracting with a state or state body you may need to consider including a waiver of any immunity, both as to jurisdiction and execution, in the arbitration agreement.

The choice of seat is again very important here. Where the defence of sovereign immunity is raised, the tribunal's ability to consider that defence will be determined in accordance with the law of the seat of the arbitration. If you are contracting with a state, you need to ensure that the arbitration clause stipulates a seat where the law follows a restrictive approach on sovereign immunity - for example, London or Geneva as opposed to the People's Republic of China.

Confidentiality

Under English law there is an implied duty of confidentiality in arbitration, but this is not the case in some other jurisdictions. If confidentiality is important, you should consider including an express obligation to keep the arbitration and all materials generated for the purpose of the arbitration confidential in the arbitration clause. You may not need to do this in all cases, as some of the institutional rules already provide for confidentiality.

Opting out of the non-mandatory provisions of the Arbitration Act

The Arbitration Act is the main law governing arbitration procedure in England. Some of the institutional rules exclude the non-mandatory provisions under the Act: by agreeing to this exclusion the parties waive the right to seek a determination from the English courts on a preliminary point of law or to appeal an award on a point of law. If you are using institutional rules which contain these exclusions but you wish to retain these rights then your arbitration clause will need to make this clear. Similarly if the rules you are using are silent on this point and you wish to exclude the provisions, then the clause should state this.

Enforcement

This is not a drafting issue as such, but it is an extremely important issue to consider at the outset and is an important factor when considering the seat of the arbitration. If the seat is in a country which has signed the New York Convention, then the award will be recognised in all the other signatory countries. For the full list of signatories, see the UNCITRAL website.

Authority to sign arbitration agreements

Check that the person signing the arbitration agreement – which, in many cases, will be the main contract containing the arbitration clause within it – has authority to enter into arbitration agreements. Bear in mind that in some jurisdictions a special power of attorney will be needed.

Capacity to enter into arbitration agreement

Check that all parties have the capacity to enter into the agreement. For example, French public bodies are not normally entitled to arbitrate in domestic arbitrations unless authorised by decree. Under Dubai law if the Government of Dubai or its departments and corporations are party to a contract, the arbitration must take place in Dubai and must be governed by Dubai procedures and laws unless an exception has been granted by the Ruler of Dubai.

Other drafting options

As well as the principal issues discussed above, the International Bar Association (IBA) provides suggested drafting for optional elements such as document production, allocation of costs and fees, qualifications of arbitrators, time limits and finality. For more information, see the IBA Guidelines on drafting international arbitration clauses.

Expertise in International Construction Arbitration

We are instructed by companies, governments and state agencies across all sectors on large, complex, international arbitrations for: joint venture and consortium arrangements, software and technology projects and contracts involving the supply of energy, licensing, commodities, manufacturing and international sales and distribution. We work regularly with local lawyers, consultants and experts in different languages and across different jurisdictions.

More about International Construction Arbitration