Creating an Arbitration Clause

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The following points should be considered when drafting the arbitration clause.

1. Arbitration Rules

You should decide whether you wish to proceed under ad-hoc arbitration or institutional arbitration.

As a general proposition, the arbitration clause used should be coordinated with and reflect the arbitral rules of the institution or ad-hoc procedure chosen.

Institutional arbitration are dispute settlement proceedings supervised by an organization or institution, in accordance with the rules of arbitration established or approved by that institution.

By choosing institutional arbitration, the parties or institution rely on the expertise of the institution and its resources for selecting arbitrators and for administering or managing the arbitration.

Ad-hoc arbitration means there is no formal administration of the arbitration or dispute settlement process by any established arbitral organization. Instead, the parties create their own procedures for the arbitration. This can be accomplished, for example, either by: (i) drafting a set of ad-hoc procedures in a contract; (ii) referring to a set of generally accepted ad-hoc arbitration rules, such as the UNCITRAL Arbitration Rules; or (iii) allowing the arbitration tribunal to produce its own procedures after the dispute has arisen. Ad-hoc arbitration can sometimes be less expensive, but it places more of a burden on the parties to organize and administer the arbitration.

2. Place of Arbitration

The parties should select a site for the arbitration that is convenient to them and to those who may eventually become witnesses in any proceeding. Arbitration can conveniently be held in any of the NAFTA countries as the laws of the three NAFTA countries all support international arbitration. If you select a place of arbitration outside the NAFTA countries, you should consider various aspects of national law that may affect the conduct of the arbitration, including the following:

If you adopt institutional arbitration, it is usually not necessary that the institution chosen be located in the place of arbitration. For example, most of the institutions listed below can administer arbitrations outside their home countries.

3. Applicable Law/Choice of Legal Regime

While not necessary, it is desirable to identify in the contract (or the agreement to arbitrate) the substantive or applicable law (or governing law) that will govern the resolution of the dispute. Failure to clarify this issue may increase the time and cost of an arbitration. If the decision as to which governing or substantive law is to apply is left to the arbitral tribunal, it may bring an unpleasant surprise to one of the parties.

Where an institution selects the chair or sole arbitrator, it is, as a practical matter, far easier to appoint the best possible person when it is known in what country's law the arbitrator should be most expert.

When deciding upon the applicable law, you should consider:

Even if the parties wish to have the arbitrators apply general principles of law or usages of trade, it is important to reference a particular substantive or governing law.

4. Composition of the Arbitral Tribunal

If the parties can agree on this issue, it is generally wise to indicate the number of arbitrators to be appointed. For complex arbitrations or those with a significant amount in dispute, three arbitrators are preferable. If the arbitration is likely to involve only a few straightforward issues and the amount in controversy is likely to be relatively small, one arbitrator may be chosen.

Having one arbitrator may be cheaper and more expedient. If the amount in dispute warrants it, three arbitrators increase the likelihood of a fair, well-reasoned result. While a three-arbitrator panel also provides the parties with more control over the nature or composition of the tribunal, (as each party will generally each select one arbitrator), it increases the cost and logistical difficulties of the arbitration. Where appropriate, the parties may also specify required qualifications for the arbitrators (education, occupation and/or expertise in a particular subject matter, etc.)

5. Language

If the parties come from countries with a common language, it may not be necessary to include a provision regarding the language in which the arbitration will be conducted, based on the presumption that the language in which the contract is written will apply. If the language is not specified, the arbitral tribunal will decide the question of language. It is possible (but not recommended) to conduct an arbitration in two languages.

If the parties are from countries with different languages, it is important to specify the language of the arbitration. Simultaneous interpretation at hearings and translation of all documents into two or more languages are enormously expensive and time-consuming. If it is not possible to agree on a language in the arbitration clause, then it is desirable to agree that costs for interpretations and translation are either shared or borne by the party requiring the interpretation or translation.

6. Additional Matters to be Considered for Inclusion in the Arbitration Clause

An arbitration clause need not be lengthy or complicated to be effective. A lengthy clause specifying too many procedures may limit the flexibility of the parties and the arbitrators in conducting the arbitration in the most efficient way possible. As arbitration is always based on an agreement to arbitrate, the parties should think about the nature of the disputes that might arise and consider whether some of the following matters should be included in the arbitration clause. Discussing the matters together, at the time of contract drafting and when relationships are cordial may result in saving time trying to resolve these matters after a dispute has already arisen.

Here are some additional matters to possibly consider for inclusion in an arbitration clause:

To see a model arbitration and mediation clauses addressing some (but not all) of the issues listed above, click here. Note that these clauses are meant to serve only as a starting point for drafting such clauses and that parties may need to consider additional issues before finalizing contract terms.

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