Top 10 Tips for Drafting Arbitration Clauses
Artem N. Barsukov, FCIArb
As arbitration becomes an increasingly attractive means of dispute resolution, more and more commercial contracts feature arbitration clauses. Yet, too often in negotiating their contracts, parties prefer to focus on closing the deal and avoid dealing with the unpleasant topic of dispute resolution. In the result, arbitration clauses often become an afterthought, dropped in at the 11th hour before closing.
And yet, a well-drafted arbitration clause make the difference between a highly efficient dispute resolution process and spending millions of dollars only to end up with an unenforceable award. Below are 10 tips for drafting arbitration clauses that should be kept in mind any time you draft an arbitration clause.
1. Ensure you have all essential elements. For an arbitration clause to be effective without further assistance from courts or tribunals, it must contain five essential elements: (i) an express statement that all disputes arising from or in connection with the contract shall be resolved through arbitration; (ii) applicable arbitration rules; (iii) place or legal seat of the arbitration; (iv) number of arbitrators; and (v) language of the arbitration. Make sure your arbitration clause addresses all five of these elements at a minimum.
2. Consider whether the arbitration should be institutional or ad hoc. An arbitration can either be administered by an arbitral institution or carried out ad hoc. In institutional arbitration, the parties rely on an arbitral institution — such as ADRIC, VanIAC, ICC, or LCIA — to administer the case in accordance with its rules and to provide a range of ancillary services, including receipt and distribution of documents, managing advances on costs, resolving procedural issues before the arbitral tribunal is appointed, and even performing a final quality check of the arbitral award. By contrast, in ad hoc arbitration, the parties and the arbitral tribunal manage the case on their own. Ad hoc arbitration tends to be less expensive and provides ultimate procedural flexibility, but requires experienced counsel and arbitrators to be effective. On the other hand, institutional arbitration might be more expensive and somewhat less flexible, but worthwhile when parties and their counsel are either unfamiliar with the process or come from different legal systems (e.g., common law vs civil law). Arbitral institution may also assist with the appointment of experienced arbitrators through their formal and informal rosters.
3. Choose appropriate and modern arbitration rules. There is a wide range of arbitration rules for the parties to choose from. What set of rules will be appropriate depends on the nature of the dispute and the surrounding circumstances. For example, some arbitration rules permit dispositive motions for early resolution of discrete issues, while others do not. Some arbitration rules may be more up-to-date than others and address emerging issues, such as third-party funding and virtual hearings. Finally, an increasing number of arbitral institutions, including VanIAC and ICC, offer a separate set of “expedited rules” which provide for simplified procedures to enable faster and less expensive resolution of smaller disputes. Given that arbitral institutions usually administer arbitrations in accordance with their own rules, the choice of arbitration rules may strongly influence the choice of arbitral institution and vice versa.
4. Choose the place of arbitration carefully. The choice of the “place” or “legal seat” of the arbitration is of critical significance, as it determines the laws that will govern arbitral proceedings. The choice may thus affect a host of key issues, including whether the dispute can be settled by arbitration, the format and content requirements for the award, grounds for setting aside the award, and appeal rights, to name a few. For this reason, never choose the place of arbitration based simply on how attractive or convenient the location is. Always consult with experienced arbitration counsel or local counsel in the place of arbitration to determine potential risks and pitfalls. Note that you can always agree to hold the actual hearing at a different location than the “legal seat” of arbitration.
5. Do not constrain your choice of arbitrators. While the ability to “select your own judge” is often seen as a key benefit of arbitration, it is not always prudent to specify arbitrator qualifications in the arbitration clause. You rarely know in advance what type of dispute will end up going to arbitration. An arbitration clause that requires arbitrators to have technical expertise may be ill-suited for a dispute that is purely legal in nature. Further, prescribing qualifications — especially multiple qualifications — may significantly shrink the pool of available arbitrators. Finally, specifying arbitrator qualifications increases the risk of that the award might be set aside, as the losing party will have an opportunity to argue that the arbitral tribunal was not constituted in accordance with the arbitration agreement.
6. Expressly set out appeal rights. Most people think of arbitration as producing a final decision that is not subject to any appeal on its merits. However, as with other things, this too can be customized in the arbitration clause. Thus, before drafting the arbitration clause, you need to consider whether and to what extent you would like to have appeal rights. Not having a right of appeal will promote quick and final disposition of the dispute; however, parties will have to live with the arbitrator’s decision, even if the case is wrongly decided on the merits. If the primary goal is to achieve prompt resolution of the dispute and to move on, then there is little rationale for a right of appeal. If, however, the primary goal is to “get it right”, then rights of appeal should be given some thought. In either case, ensure that the arbitration clause expressly addresses the issue, particularly in the context of domestic arbitrations, where there may be statutory rights of appeal if the arbitration clause is silent on the matter.
7. Address confidentiality of proceedings. While confidentiality is often seen as one of key benefits of arbitration, few arbitration rules actually address this topic, and when they do, they often limit the scope of confidentiality protections. If you want every element of the arbitral proceedings — including their existence — to be confidential, ensure you address this in the arbitration clause. Confidentiality may also play in favour of choosing institutional arbitration, as arbitral institutes can privately resolve procedural disputes that arise prior to the appointment of the arbitral tribunal. By contrast, in ad hoc arbitration, any such disputes would have to be dealt with in open court.
8. Avoid mandatory time limits. It is becoming increasingly common for arbitration clauses to provide time limits for proceedings. These time limits are often unrealistic and couched in mandatory terms (e.g. “an award shall be rendered within 6 months from the constitution of the tribunal”). If the prescribed time limit is not met, the arbitral award may be set aside on the basis that the arbitration agreement was not complied with. If you must have a time limit, ensure that it is couched in aspirational terms and expressly allows the arbitral tribunal to extend the time limit where necessary.
9. Address continuing performance. Arbitration rules generally do not require parties to continue to perform their obligations after proceedings had begun. This can sometimes lead to one of the parties suspending performance during an arbitration as a pressure tactic. To avoid this, ensure that your arbitration clause requires parties to continue performing their obligations during any pending arbitration.
10. Consult experienced arbitration counsel. These tips are only general suggestions that will not work for every situation. To ensure that you have a robust arbitration clause that meets your unique needs, always consult an experienced arbitration practitioner when drafting the underlying agreement, whatever the nature of the transaction. The time to figure it out is when the parties shake hands, not when they throw down the gauntlet.