Arbitration Clause; A Double-Edged Sword?

Arbitration Clause; A Double-Edged Sword?

Arbitration Clause

For many arbitration proceedings, the standard model clause, drafted by the arbitral institutions chosen by the parties to administer the arbitration process, is considered an appropriate option to set the arbitration in motion. Such clauses will prevent confusion and uncertainty of the parties and arbitrators regarding the real intention of the parties with respect to the details of the intended arbitration and its formalities. Having said that, more caution needs to be exercised when the parties agree on ad-hoc arbitration. In other words, in the latter type of arbitration, more precise details need to be provided in the dispute settlement clause, since misleading or erroneous details can lead to defective clauses, disrupting the smooth progress of the arbitration.

Arbitration clauses are normally drawn up and agreed before any dispute has arisen. In fact, they are designed for the potential upcoming disputes and act as a roadmap for moving towards resolving disputes through arbitration, rather than domestic courts. The second type of agreement is one that is made after a dispute has actually arisen. They are the so-called ‘submission agreements’ . They are, ordinarily, more detailed than simple arbitration clauses — because once a dispute has arisen, it is possible to spell out in more details what the dispute is about and how the parties propose to deal with it.

As a gneral rule, whether the arbitration agreement provides for an ad hoc arbitration or an institutional arbitration, it is important to be in writing, since it is required for enforcement purposes under the New York convention. States parties to the Convention agree, in Article II(1), that they will recognize any ‘agreement in writing’ to submit to arbitration disputes which are capable of settlement by arbitration. In Article II(2) an ‘agreement in writing’ is defined to include an arbitration clause in a contract; or an arbitration agreement ‘signed by the parties or contained in an exchange of letters or telegrams.

It is also required by many arbitration regulations, such as the UNCITRAL Rules, adopted as the arbitration law by many countries. These Rules provide that Where the parties to a contract have agreed in writing that disputes in relation to that contract shall be referred to arbitration under the UNCITRAL Rules, then such disputes shall be settled in accordance with these Rules subject to such modification as the parties may agree in writing.

One problem arises when the parties add to an arbitration clause provisions that potentially conflict with the local law, they risk invalidating the arbitration agreement or the arbitration award. An example of a provision that might cause an arbitration award to be invalidated in some jurisdictions, like in France, is a clause that provides for expanded judicial review of an arbitration award.

An important point to keep in mind is that the arbitration agreement is governed and affected by various laws, namely the law of the seat of arbitration and the law of place of enforcement of the award. Compliance with such laws will also be a decisive issue for the arbitration, since the ultimate goal of going through the arbitration process is to enforce the arbitration award, i.e. seizure of properties and assets of the losing party.

What is certain is that, the final result of the dispute settlement process can be affected, to a great extent, by the relevant clause, and the formulation of defective arbitration clauses can seriously jeopardize the parties interests. Here, many problems might occur, either inadvertently or due to insufficient familiarity of one or both parties with the arbitration procedures. Another reason that leads to possible problems in the settlement of future disputes is that in some cases the parties do not feel the need for such clauses. As a result, they do not pay enough attention to it during the negotiation and drafting phase of the contract, because at this stage the parties seek to secure their commercial interests and it is difficult for them to imagine the occurrence of serious disputes in the future.

Experience shows that many parties are not aware of the importance of formulating an appropriate arbitration clause and its role in the smooth progress of the arbitration process. In practice, it is sometimes noted that certain arbitration clauses contain defective texts and, thus, they leave unfavorable results for one or both sides of the dispute. Such clauses are called “pathological clauses”. (Click here to see some examples of such clauses).

In some instances, reference to an arbitration institution may be defective or completely erroneous. It may be agreed upon to settle the dispute through arbitration on an optional and non-binding basis. It may involve a faulty mechanism for appointing arbitrators, for example, the appointing authority refuses to do so. Alternatively, on the other hand, the agreement may itself appoint arbitrators who are deceased by the time the dispute arises.

As an exemplification, in one of the international commercial arbitration cases, the contractual arbitration clause referred to the “ICC in Geneva”! However, as is known the ICC International Court of Arbitration is headquartered in Paris. This mistake led the claimant to bring their claim before the arbitration center of the Geneva Chamber of Commerce and this in turn caused the claimant to incur extra costs. Finally, that center did not establish its jurisdiction and the claimant had to bring the case to the ICC headquarters in Paris.

As stated earlier, “pathological arbitration clauses” appear in various forms and suffer from one or more defective elements. According to the jurisprudence of Swiss Federal Tribunal (SFT), pathological arbitration clauses arise from incomplete, unclear, or contradictory provisions in arbitration clauses.

The significance of drafting arbitration terms is not only limited to avoidance from drafting defective terms, but it can also be a matter of choosing among more favorable options. As mentioned above, a defective clause might lead to the rejection of the claimant’s claim at the relevant arbitration forum; a mistake which is usually made by non-professionals. Therefore, drafters and negotiators of the international commercial contracts are required to use their utmost care and diligence when they are involved in this process . Evidently, having due regard to the peculiarities of dispute settlement procedures by the parties can facilitate the settlement of disputes and neglecting them can cause serious challenges to one or both parties.

The most important issues to be addressed include, but are not limited to, the determination of the scope of the arbitral tribunal’s powers, the number of arbitrators, the seat of the arbitration, the location of possible hearings, finality of the award, the choice of rules governing the procedure, appointing authority, multi-stage dispute resolution, transparency in the selection of arbitrators or arbitration organization, costs.

Overall, arbitration is primarily a matter of contract between the parties and the jurisdiction of an arbitral tribunal is grounded entirely in the mutual agreement of the parties.

However, in case the parties to the contracts wish not to face serious problems in the future, the drafting of dispute resolution clauses, and international commercial contracts in general, should be done by experienced lawyers and practitioners in these fields. In this context, sample arbitration clauses can be considered as a suitable model for formulating the dispute settlement clauses.

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