Creating an Arbitration Clause
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- Arbitration Rules
- Place of Arbitration
- Applicable Law/Choice of Legal Regime
- Composition of the Arbitral Tribunal
- Additional Matters to be considered for Inclusion in the Arbitration Clause
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:
- the likelihood and extent of involvement of the national courts in the conduct of the arbitration;
- whether the country is party to either the New York Convention or the Panama Convention on enforcing arbitral awards (these international conventions make enforcement of the final award substantially easier);
- the extent of any mandatory procedural rules that must be adhered to in the conduct of the arbitration; and
- restrictions on the ability of non-nationals to serve as arbitrators or as counsel.
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:
- a legal system that has developed a body of law relating to the specific issues likely to arise;
- whether only the laws that regulate the subject-matter (substance) of the dispute should apply, or if the applicable law of a country also includes international law rules within that country that may, in turn, refer the dispute to the law of another country (known as conflicts of law provisions); and
- whether the chosen 'governing law' considers the subject matter of the contract to be arbitrable (for example, copyright, patent and antitrust matters may not qualify as arbitrable matters in some countries).
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.)
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:
Discovery and Production of Documents
Usually, the arbitration rules chosen by the parties will provide that the arbitral tribunal may establish the procedures for the discovery and production of documents. Depending on the circumstances of the case, it may be advantageous to provide for specific discovery rules.
Some arbitration rules deal specifically with the question of interim relief, that is to say, whether the parties may apply to a court for a preliminary injunction, an order of attachment or other order to preserve the status quo until the arbitrators can decide the case. The rules of most arbitration institutions provide that resort to a court in such circumstances is not incompatible with, or a waiver of, the right to arbitrate under those rules. Most arbitration rules provide that the arbitrators, once selected, may order interim relief. However, if the parties believe that it may be necessary to resort to interim relief to maintain the status quo, then they should check the rules chosen and, if necessary, add a specific clause providing for the availability of such interim relief.
If there are more than two parties to the contract, or if the parties are entering into several related contracts, they may wish to consider including a provision that any arbitrations among them or with respect to the related contracts will be consolidated into a single proceeding.
The drafting of a consolidation clause is very difficult, and expert advice should be sought for assistance in drafting it.
Relief to be Granted
Ordinarily, the arbitral tribunal may grant any remedy or relief within the scope of the agreement of the parties which is permissible under the substantive law applicable to the dispute. If the parties wish the arbitrators to decide the case, not according to a specific law but according to the common usages of trade or industry, or if there is a particular kind of relief that the parties wish the arbitrators to be able to award, then the parties should include specific language in their arbitration clause to allow for such remedy or relief.
Most national laws regulate specific time limits (usually several years) within which claims must be initiated. The parties may also wish to consider whether a specific time limit should be placed on the conduct of the arbitration. If any time limit is chosen, it must be realistic. Again, it is recommended that interested parties check with the appropriate arbitration institution to determine what a reasonable timetable would be.
Costs and Expenses
The rules of various arbitration institutions and ad-hoc rules vary with respect to who will pay for the costs of the arbitration, including attorneys' fees. Usually, however, the rules provide that the question of who will bear these costs is within the discretion of the arbitral tribunal. The parties may wish to consider whether they want to include a provision specifying how costs and expenses, including attorneys' fees, shall be apportioned in any arbitration.
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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