Your dispute resolution strategy does not start only once a dispute arises. As part of the in-house legal team, you are the guardian of your company’s legal interests from contract negotiations to enforcement of arbitral awards. Be the internal asset and business partner you’re meant to be!
At Jus Mundi, we are aware that not all legal departments have a dedicated arbitration or disputes team. To make your life extra easy, Jus Mundi is publishing a series of practical Arbitration Know-How articles, specifically intended for in-house counsel.
Take a look at the first article of the series, The Ultimate Arbitration Checklist: a Practical Guide for In-House Counsel, which exposes, in practical terms, the steps to be taken in the contract negotiation phase, pre-dispute phase, and during arbitration.
Other articles of our Arbitration Know-How series will cover:
- Arbitrators’ selection tips, so you can be more autonomous in making this crucial decision and save on legal costs;
- Prompting compliance with awards without having to enforce them, so you can recuperate your damages effectively and swiftly.
As a preamble, an important distinction must be made. There are two main types of arbitration mechanisms:
- Investor-State Arbitration (also referred to as ISDS), and
- International Commercial Arbitration.
In Investor-State Arbitration, you usually do not need to draft or review an arbitration or dispute resolution clause. Treaties of public international law under which foreign investments are made in a host country govern the dispute resolution mechanism, i.e., the “clause” is included in the Treaty. It will not contain some of the elements required in a commercial arbitration clause, and the consent to arbitration arises under the Treaty.
In International Commercial Arbitration, the consent to arbitration arises from the dispute resolution/arbitration clause contained in the contract(s) it governs. The authority of arbitral tribunals arises from the consent of the parties granted in their arbitration clause. They have no inherent jurisdiction, unlike domestic courts.
Therefore, it is up to the parties to carefully agree on the terms of the clause and ensure its validity, as it is the source of the arbitral tribunal’s power to adjudicate their disputes.
A poorly drafted arbitration clause may lead to jurisdictional disputes, usually relating to the scope of the arbitration clause, consent of the parties and its signatories.
In this article, we will provide tips on how to confidently draft and review commercial arbitration/dispute resolution clauses and never use claim-generating or pathological clauses again.
Note that you can always agree to arbitration once a dispute has arisen, even if the contract does not contain an arbitration clause. However, it is known to be harder to agree with the adverse party once a conflict is born.
- First read the Part 1 of our Arbitration Know-How Series, as a whole section is dedicated to the contract negotiation phase and how to prevent risks as well as implement dispute avoidance techniques.
- Legal monitoring is tremendously important to stay abreast of legal developments in the interpretation of clauses, including arbitration agreements. In addition to paying special attention to the clauses in your contract, pre-contractual risk assessment should also involve a thorough evaluation of potential business partners and co-contractors.
The Dire Financial & Legal Consequences Of Concluding An Unclear or Pathological Arbitration Agreement
As previously discussed, arbitration has many benefits (See The Ultimate Arbitration Checklist: a Practical Guide for In-House Counsel).
However, these benefits can be nullified by a claim-generating arbitration clause, which can lead you to court before you even start your arbitration.
Dispute resolution clauses are familiarly called “midnight clauses” because these clauses are often reviewed last minute, before signing a contract. They may seem unimportant compared to other substantive clauses of a contract, especially compared to financial clauses. It is your role to educate internally about the tremendous importance of such legal clause, to ensure sufficient time is spent drafting or reviewing it.
Indeed, choosing arbitration over litigation is meant to save your business time and, hopefully, cost but can quickly become a legal issue in and of itself with dire financial consequences. If you do not draft a clear and unambiguous arbitration clause right from the get-go (i.e., the contract negotiation stage), you could end up entangled in a dispute resolution clause-related dispute, on top of the actual substantive contractual dispute.
This would increase the legal cost of your dispute, the time spent in arbitration and, potentially, litigation, which ultimately means you may be defending yourself or not recuperate damages for many years. It also implies that the dispute may impact your business’ books/cash flow for many years, and potentially negatively impact your reputation with the general public and the level of trust of shareholders.
Good to know:
Even if your contract is alleged to be void, cancelled, or terminated, the arbitration clause will remain applicable. It is widely recognized as an independent agreement in and of itself, meaning separate from the main contract. Therefore, the arbitration clause still applies, and arbitration remains the means to resolve a dispute regarding a void or terminated contract. A party attempting to go to domestic courts would likely be sent back to arbitration, as required by the clause.
Top Tips To Draft An Effective Arbitration Clause
An explicit referral of disputes to arbitration
The question you must ask yourself is: Do you wish for all disputes arising from and related to the contract to be referred to binding and final arbitration?
- If so -which is often the case-, you must choose the terms identifying the scope of the arbitration clause carefully to ensure it does encompass any and all disputes related to the underlying contract and potential ancillary contracts.
Note that the arbitral tribunal is not at liberty to extend its own jurisdiction over disputes that are not included in the arbitration clause, unless the parties so agree.
Example of terms commonly used to define broadly the scope of the arbitration clause:
“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination”
- If you wish to exclude certain categories of disputes from the scope of the arbitration clause, you can precise the other means to resolve them, such as expert determination.
These clauses require careful drafting. Including provisions for the resolution of disputes regarding the category in which a dispute falls is a good practice in such cases.
Note that some disputes may not be arbitrable under the applicable law of the contract.
Non-equivocal terms choosing institutional or ad hoc arbitration
|Predefined set of rules to handle the administration and procedure of the arbitration||In addition to the arbitrators and adverse parties, all communications must usually also be addressed to the institution|
|No need for an additional level of agreement regarding the details of the procedure||Less flexibility in personalizing the procedure|
|Assistance in getting parties involved in the arbitration||No possibility to diverge from the rules of the institution, or to use other rules than the institution’s generally|
|Administrative support provided by the institution||Administrative fees can be deterring|
|Predefined format of the arbitration procedure|
|Assistance in constituting the arbitral tribunal, inc. the possibility to select specialized arbitrators from the institution’s rosters or the suggestions of knowledgeable case managers|
|Support of the institution which ensures that arbitrators are working with a reasonable timeline|
To make the most appropriate choice for your bottom line, you can estimate the overall cost of resolving a dispute via international arbitration through some institutions’ cost calculators or Reed Smith’s Arbitration Pricing Calculator.
Unless you act in the shipping/maritime industry (according to our data, 76% of arbitrations are ad hoc in this sector), institutional arbitration is usually preferred as it brings a certain level of security to the arbitral process, which is managed by a third-party neutral.
Poorly led, an ad hoc arbitration may actually end up costing more than an efficiently led institutional arbitration.
To find out which arbitral institutions are most selected in your industry, take a look at our Industry Insights Reports.
A clearly identified arbitral institution (and its rules) to administer the arbitration
As discussed in the Arbitration Checklist, these choices are extremely important.
You have plenty of options, depending on the criteria that matter most to your business and a given contract, such as whether the institution is specialized in a specific subject matter (for instance, EDAC for energy disputes), or whether a specific institution is a pillar in a region of interest (for instance, SIAC or HKIAC in the APAC region).
Pitfalls to avoid:
- Do not use vague names to identify an institution. Make sure there cannot be any interpretation as to which institution is referred to.
- Do not use hybrid clauses, e., do not choose an arbitral institution and another one’s rules. This is not permitted by many institutions’ rules and, even if it were, creates procedural uncertainty as well as jurisdictional disputes. In general, the choice of an arbitral institution entails the choice of its rules to govern an arbitration.
- Jus Mundi’s Arbitral Institution Profiles provide comprehensive analytics and insights into institutions’ caseload. This helps narrow down the choice of the institution and rules for the arbitration clause.
- Take a look at the rules of the institutions you are interested in to ensure you understand beforehand how an arbitration and its procedure would be handled.
501 arbitral rules are currently available on Jus Mundi.
- Finally, to guarantee that the institution and its rules are properly identified in the arbitration clause, take a look at the website of the institution you are considering. Many of them propose a model clause which includes a reference to that institution and its rules. You cannot go wrong using the institution’s own arbitration clause! You can then modify as appropriate.
The seat of arbitration
As discussed in our Arbitration Checklist, the choice of the seat of arbitration influences your whole arbitration and should not be taken lightly.
The seat of arbitration determines the legal framework within which an arbitration takes place, i.e., the procedural law applicable to the arbitration, the courts responsible for applying procedural law, and the “nationality” of the award for enforcement or setting-aside purposes. In addition, the seat of arbitration may determine the national laws applicable to the question of the validity of an arbitration agreement/clause or interim remedies.
There may be significant differences in arbitration laws around the world, some have more restrictive approaches while others are more liberal and arbitration-friendly, so the choice of the seat is of material importance.
What you should consider:
- Choose a jurisdiction which has a friendly stance toward arbitration, so national courts tend to interpret arbitration clauses to make them enforceable in most cases (even when they have some deficiencies).
- Get informed as to the state of the judiciary in the chosen jurisdiction, e., ensure that it is independent, efficient, and preferably, has experience of complex commercial cases.
- Make sure that the chosen jurisdiction is a signatory of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (also called New York Convention). This may make a considerable difference once an arbitral tribunal has rendered an award: you may challenge the award on the grounds established in the New York Convention or use it to enforce the award in any signatory jurisdiction.
- The seat and place where the arbitration is to take place usually coincide.
- If so, take into account how convenient and/or costly choosing a certain seat may be. Also look into the infrastructure such as the internet connection if you intend to have witnesses join hearings virtually, for instance.
- If not, clearly differentiate one from the other in the arbitration clause.
- The seat and place where the arbitration is to take place usually coincide.
The governing law of the contract
The governing law is the law applicable to substantive issues, such as the breach of contractual obligations, disagreement on the interpretation of a contractual clause, etc.
Different considerations can influence this material choice: the subject matter of the contract and how a jurisdiction deals or does not deal with it (e.g., trusts only exist in some jurisdictions); the law of the jurisdiction the legal department of a company is mainly based in and therefore familiar with; and such.
- To guarantee clarity, the governing law/choice of law clause of the contract and the arbitration clause should be drafted separately. If the governing law of the contract is, indeed, not included directly in the arbitration agreement, ensure that it does not conflict with it (g., by referencing disputes to courts).
- It may prove useful to include both the governing law of the arbitration agreement and the governing law of the underlying contract. Some choose the governing law of the arbitration agreement to follow the law of the seat, while others choose to extend the contract’s applicable law to the arbitration agreement.
Nice To Have…
A multi-tiered or escalation dispute resolution clause
These types of clauses are more complex and can therefore easily become pathological and void. However, requiring that parties go to mediation or use a cooling-off period to negotiate an amicable resolution, before even considering going to arbitration, may help salvage the business relationship between partners and save on legal cost.
Multi-tiered dispute resolution clauses have many advantages:
- They are non-adversarial, as a first recourse, and can, therefore, avoid burning bridges between long-term or continuous business partners.
- They are helpful to resolve a dispute amicably and expediently while saving on legal cost.
- They can assist in avoiding going to arbitration altogether.
- Mediation or negotiation before bringing the case to court or arbitration can help you better understand your case’s strengths and weaknesses, as well as your chances of success, if you were to go to arbitration.
Create a timeline for the execution of the multi-tiered dispute resolution clause. What steps are required, in what order, within what timeframe, etc. This will ensure the clause is clear or might be misinterpreted. It can also serve as a reference document for operatives.
Number and method of appointment of the arbitrators composing the tribunal
The arbitral rules tend to provide for the number and method of appointment of the arbitrators composing the arbitral tribunal. However, it is recommended to crystallize the decision in the arbitration clause. Some national arbitration laws impose that this information appear in the arbitration clause.
Remember that it is easier to agree on such “details” while the relationship with the co-contractor(s) is amicable, rather than once a dispute has arisen.
It is common to choose to have a three-arbitrator panel, each party appointing one arbitrator and the president either selected by these party-appointed arbitrators, the parties or the arbitral institution. The arbitral institution may provide help and advice in constituting the tribunal if need be.
Read our tips to become more autonomous in selecting your arbitrator and conducting your due diligence, thereby saving on legal costs, in Part 3 of our Arbitration Know-How Series.
A mention of the language in which the arbitration is to be conducted
Decide on the language in which all your written submissions and hearings are to be conducted. A different language other than the one in which your contract negotiations, documentation, or exchanges with your co-contractors are drafted will require translation, likely increasing legal costs.
A provision for the confidentiality of the arbitration, if it matters to you
Depending on the sensitivity of the matter, provide specifically for the confidentiality of the arbitration, rather than rely on general confidentiality provisions applicable to the underlying contract. Some arbitration rules already contain express confidentiality provisions.
We hope you found our Arbitration Know-How Series helpful. Learn more about the specific stages prior to and during arbitration at which you can be more independent, save on legal costs, and truly be known internally as a risk-mitigating and cost-saving department.
Don’t miss any of our useful content, practical tips, legal intelligence, interviews, and much more! Subscribe now to our Newsletter and stay in the know!
About the author
Clémence Prévot is a former arbitration lawyer, qualified in NY and Paris, who now manages Jus Mundi‘s Blog, content collaborations, newsletters, and our notorious Industry Insights Reports. She brings practical insights to the content created at Jus Mundi, thanks to her all-around experience in arbitration. She worked in law firms but also in an arbitral institution, as a mediator, and with third-party funders, in different jurisdictions.
Reach out to her with feedback, content ideas, and suggestions! (She doesn’t bill for her time anymore, so don’t hesitate to get in touch!)