Arbitration Clause in a Contract for Institutional Arbitration

An arbitration clause in a contract is a pivotal element that significantly influences the cost, efficiency, and overall management of disputes. It is a foundational component that parties must carefully consider and draft to ensure that their dispute resolution mechanism aligns with their commercial objectives and the specific nature of their contractual relationship. The common elements typically included in an arbitration clause are the type of arbitration, with parties having the choice between institutional and ad hoc arbitration. If institutional arbitration is selected, the clause should specify the name of the arbitral institution and its rules, the seat or legal place of arbitration, the language of the proceedings, the number of arbitrators, and the governing law of the contract.

When institutional arbitration is chosen as the preferred method of dispute resolution, it is essential to decide this during the negotiation of contracts, treaties, or separate arbitration agreements. If both parties consent, the clause should be drafted to include a clear and comprehensive reference to the institution and its rules. A standard and widely accepted formulation is: All disputes arising out of or in connection with the present contract, including any question regarding its existence, validity, or termination, shall be finally settled under the rules of arbitration for the time being in force of the designated institution by one or more arbitrators appointed in accordance with the said rules. It is also advisable for the parties to stipulate in the arbitration clause the law governing the contract, the number of arbitrators, the place of arbitration, and the language of the arbitration to provide further clarity and avoid potential disputes on these procedural aspects.

Unlike litigation, which is a default mechanism provided by the state, arbitration must be specifically chosen by the parties as a dispute resolution mechanism. This choice can be set out in a separate arbitration agreement once a dispute has arisen or, more commonly, incorporated into the underlying commercial agreement through the inclusion of an arbitration clause. This comprehensive guide addresses the key issues to bear in mind when drafting international arbitration clauses, providing a detailed overview of the considerations and best practices for ensuring an effective and enforceable arbitration agreement.

Why Choose Arbitration?

Parties to international commercial disputes often choose arbitration for several compelling reasons. First, they can have the dispute heard in a forum that they perceive to be more neutral than a national court, which is particularly important in cross-border transactions where one party may be concerned about home court advantage for the other. Second, arbitral awards are generally easier to enforce abroad than court judgments because of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been ratified by over 160 countries. Third, parties can select arbitrators with specific expertise in the relevant industry or subject matter of the underlying commercial contract, ensuring that the decision-makers have the necessary technical knowledge. Fourth, arbitration offers greater procedural flexibility compared to court proceedings, allowing parties to tailor the process to their specific needs. Finally, arbitration proceedings are generally private and confidential, which can be crucial for protecting sensitive commercial information and business reputation.

However, sometimes parties prefer to litigate in a national court for various reasons. The range of remedies available in litigation is usually wider than in arbitration, as courts can issue orders affecting third parties who are not party to the arbitration agreement, such as freezing orders that can be served on third-party banks. Litigation in some jurisdictions can be quicker and cheaper than international arbitration, particularly for straightforward disputes. Additionally, parties may wish to seek publicity for a claim or set a legal precedent, which is not possible in the confidential setting of arbitration.

How to Draft an Arbitration Clause

The first step in drafting an arbitration clause is to consider what the parties want to achieve. Is enforceability or confidentiality the key factor? Or is arbitration the only viable means of dispute resolution, given that there are two or more international parties involved? As with all contract clauses, to introduce a standard arbitration clause into all contracts can be unhelpful, since there is no such thing as a standard contract or a standard dispute. Rather, the parties should consider whether there are any matters that the clause ought to address in the particular circumstances.

The parties should carefully consider the nature and value of potential claims, both monetary and otherwise. The complexity of potential claims, including whether these are likely to involve technical matters, should also be assessed. The speed with which a decision is required, especially if there is an ongoing contract to be performed, is another critical factor. The location of the relevant parties and, for the purposes of enforcement, their assets, should be taken into account. The language to be used in the arbitration, whether the resolution of the dispute is likely to require written or oral evidence, and multi-party issues such as whether there are more than two parties to the contract or involved in the same project, are all important considerations. Additionally, parties should consider whether pre-arbitration alternative dispute resolution mechanisms such as mediation are desirable, and whether there are any particular types of dispute, such as completion account disputes, which would be more suited to expert determination rather than arbitration.

Some of these issues give rise to distinct drafting points in their own right, while others inform decisions on, for example, which arbitral rules should be chosen. Often parties cannot predict accurately the types of dispute that may arise and how their adversaries might react to them. They may have a broad idea, however, and by considering the potential threats, parties can tailor the arbitration mechanism to the likely types of dispute. For example, if the counter-party is a state-owned entity from a country in which state-owned entities are known to take every opportunity to delay proceedings, an arbitration administered by a well-known international arbitral institution is likely to be preferable to an ad hoc arbitration.

Key Questions to Address in Any Arbitration Clause

Parties must address several key questions when drafting any arbitration clause. These include determining which arbitral rules should be used, specifically whether ad hoc or institutional arbitration is preferable. The legal place or seat of the arbitration must be specified, as this determines the procedural law that will govern the arbitration. The number of arbitrators, typically one or three, should be decided, and the qualifications of the arbitrators may also be specified. The language of the arbitration is another crucial element, and parties should consider whether to include provisions for confidentiality and the waiver of the right to appeal.

Which Arbitral Rules Should Be Used?

All arbitrations must be conducted under arbitral rules. These can be chosen by the arbitrators themselves, but it is better for the parties to specify which rules should be used. A basic choice is between arbitration under institutional rules and arbitration under ad hoc rules. Institutional arbitration involves adopting the procedural rules of a particular institution and having that institution administer and supervise the conduct of any arbitration commenced under the arbitration agreement. Specifically, this involves the institution, depending on the particular institutional rules, administering the appointment of arbitrators, determining the fees payable to the arbitrator, often by reference to a fixed methodology set out in the institution's rules, overseeing the taking of deposits and making of payments to the arbitrators, assisting in logistics for hearings, and sometimes even scrutinising draft awards to ensure enforceability.

Ad hoc arbitration, on the other hand, is arbitration which the parties manage themselves. It is conducted under rules adopted for the purpose of the specific arbitration, without the involvement of any arbitral institution. The parties can draw up the arbitral rules themselves, leave the rules to the discretion of the arbitrators, or, as is more common, adopt rules specially written for ad hoc arbitration, such as the UNCITRAL Rules. They then proceed to conduct the arbitration in conjunction with the arbitrator directly. In other words, the appointment of arbitrators and associated issues are managed by the parties, arbitrators' fees are negotiated directly with the arbitrator and paid directly by the parties, parties must arrange all logistics for the hearing, and there is no supervision of awards.

Why Institutional Arbitration Is Often Favoured

A survey of international arbitration users found that a significant majority of arbitrations they were involved in over the past five years were institutional arbitrations. There are several reasons for this preference for institutional arbitration. An institution can lend political or moral weight to awards. More practically, because institutional rules are designed to regulate the proceedings comprehensively from beginning to end, the institutions are better suited to cater for contingencies that might arise, even if the respondent fails or refuses to co-operate. By incorporating an institution's rules into the contract, contracting parties also avoid the time and expense of drafting a suitable ad hoc clause. The institution will also assume administrative responsibility for the arbitration and take care of fundamental aspects of the arbitration procedure. The fees and expenses of the arbitration are, with varying degrees of certainty, regulated.

Ad hoc arbitration lacks the support net of an institution and depends for its full effectiveness on a spirit of co-operation between the parties, which is usually lacking by the time disputes have arisen. The potential problems of arbitration more generally, such as the ability to delay proceedings, are more likely to arise in ad hoc arbitration. Having said that, the additional layer of bureaucracy imposed by institutional arbitration may cause delay and, inevitably, additional fees are payable. Although the arbitrators' fees are reduced because they have less administration to do, the fees of the institution can add a significant amount to overall costs. This is particularly so where large amounts are in dispute and the fees are calculated by reference to the value of the claims. Ad hoc arbitration is also favoured in certain sectors, such as the shipping sector, or by contracting parties who are sophisticated users of arbitration.

Choosing the Arbitral Institution

There are many institutions to choose from. As a general rule, newly formed institutions or institutions without a proven track record should be avoided. There is no magic formula for choosing between them. Increasingly, institutions and institutional rules are offering similar processes with little to distinguish them. Such similarity leads parties to look to more subjective factors in deciding which institution to use, including familiarity with the institution, their opinion of the international acceptability or reputation of a given institution, the pro-activeness and responsiveness of the institution's staff, and the institution's neutrality or internationalism.

Questions to ask when selecting an institution include: What is the reputation and experience of the institution? How international is the institution? Do the rules cater for the specific needs of the parties? How much institutional involvement will there be? Does the institution have access to a pool of high-quality arbitrators? What will the fees and costs be and how are they calculated?

Well-known arbitral institutions include the International Court of Arbitration of the International Chamber of Commerce, the London Court of International Arbitration, the DIFC-LCIA Arbitration Centre, the Singapore International Arbitration Centre, the American Arbitration Association and its International Centre for Dispute Resolution, the Hong Kong International Arbitration Centre, the Arbitration Institute of the Stockholm Chamber of Commerce, and the Australian Centre for International Commercial Arbitration. Copies of the rules and recommended wording for arbitration clauses are published by these institutions on their websites, and these may need supplementing depending on the specific circumstances of the contract.

Where Should the Legal Place or Seat of the Arbitration Be?

The legal place of the arbitration is one of the most important matters to specify. This is called the seat of the arbitration, and it is a legal concept that ties the arbitration into a legal jurisdiction. Usually expressed as a city, the key aspect is the jurisdiction in which the seat is located, as it is the procedural law of that jurisdiction that will govern the arbitration. Getting the seat and therefore choice of procedural law right is crucial as it can affect whether the courts of the seat will intervene in the arbitration and which courts will be able to do so. It also determines whether any other rules are imposed in addition to the institutional or ad hoc rules chosen by the parties, whether the dispute is arbitrable in that country, the possibility of the arbitral award being challenged or appealed, and the enforceability of the arbitral award.

Parties must consider both the legislation enacted in the particular jurisdiction relating to arbitration and the attitude of the national courts towards arbitration generally in that jurisdiction. Most countries have legislation governing arbitrations that take place in their territory. This does not replace the arbitral rules chosen by the parties but provides a framework in which those rules operate. Many countries' national laws are based on the UNCITRAL Model Law on International Commercial Arbitration, which is intended to even out disparities between national laws and suggest a common standard for arbitral practice. Generally speaking, parties can rely on legislation based upon the Model Law, although some countries have introduced amendments that depart significantly from it. If the local arbitration law is not based on the Model Law, however, parties should not select the location without first investigating the likely impact of its legislation on any arbitration. Local law may require mandatory procedures to be implemented, the courts may be able to intervene excessively during the arbitration, and there may be barriers to enforcement of awards, including allowing multiple avenues for appeal.

The national law will also give powers to the courts of the seat in relation to certain aspects of the arbitration. Broadly speaking, these include issues such as the ability of the parties to apply to the national courts for support, for example, an order to freeze assets or obtain evidence, the ability to challenge decisions of the tribunal and the award, and provisions on enforcement. The national law and the general attitude of the judiciary in a country will determine how supportive or interventionist those courts will be. Interventionist jurisdictions, where courts interfere in the arbitral process to the detriment of its autonomy, are to be avoided. Finally, it is important that the country chosen has ratified the New York Convention, as this ensures that the arbitral award will be enforceable in other signatory countries. A recent survey found the most popular seats to be London, Paris, Singapore, Hong Kong, Geneva, New York, and Stockholm, in order of preference.

How Many Arbitrators Should There Be?

The parties can specify the number of arbitrators in the arbitration clause or leave this to be determined under the relevant rules once a dispute has arisen. Usually, an arbitration is heard by either one or three arbitrators, and indeed some countries stipulate this or require there to be an odd number. Sole arbitrators mean less expense and delay. In general, an arbitration conducted by a sole arbitrator is likely to cost, overall, about half as much or even less than an arbitration with three arbitrators. However, in high-value international disputes, it is usual to provide for the appointment of a tribunal of three arbitrators. A sole arbitrator is appointed by a third party if the parties to the dispute cannot agree, but if there are three arbitrators, each party can nominate one of the arbitrators, which can ensure that at least one of the arbitrators is familiar with the national or legal culture of the country where the relevant party is based. Note that in international arbitration, such an arbitrator is not to act as an advocate of the appointing party in the deliberations of the arbitral tribunal. Some also perceive three arbitrators as being more likely to reach the right decision than a sole arbitrator, which is important since there are usually limited grounds to appeal or challenge an arbitral award.

If you are choosing arbitration because you want your disputes to be decided by someone from the same industry or who has particular expertise, it is sensible to set this out in the arbitration agreement. It is common to see arbitration clauses where the parties agree that an arbitrator should be a member of a particular organisation or should have particular qualifications. However, be careful not to define the qualifications too narrowly, as there may then be an insufficient pool of arbitrators who are able or willing to accept appointment. In addition, you should never specify a named individual, as that person may be unable or unwilling to act when the dispute arises, and then the arbitration clause would be unenforceable.

Different Procedural Approaches

Parties rarely stipulate expressly the approach to specific procedural questions in arbitration clauses, but such considerations may have a bearing on the parties' choice of the seat of arbitration, the arbitral rules, and the identity of the nominated arbitrators. Different approaches can be adopted to the procedure used at an arbitration. Conventionally, these are categorised as common law and civil law approaches, although this is a generalisation. A good understanding of the differences is important for two reasons. First, the parties' expectations or those of their advisers may spring in part from their familiarity with the procedural rules of the courts of their own jurisdiction, and so they may prefer to take a similar approach when applying to the tribunal for specific procedural directions. Second, although under most sets of arbitration rules arbitrators have considerable procedural discretion, their starting point when making procedural directions may be the court procedural rules with which they are most accustomed, albeit tempered where necessary by an appreciation of the claimants' jurisdictional backgrounds.

A civil law approach might involve the tribunal adopting a more interventionist approach, a more restrictive approach to document production, and the tribunal playing a greater role in gathering evidence. A common law approach is likely to involve the tribunal being less interventionist, the scope of document production being similar to US or English litigation, and US or English style cross-examination of witnesses and experts by the parties rather than by the tribunal. The question of document production can be a particularly important issue where there are parties from different backgrounds. Depending on their perspective, parties may be concerned that there may be either too little or too much document production. In many instances, experienced arbitrators will endeavour to bridge the gap between different legal systems and between the parties' expectations. These issues can be dealt with at an early stage of the proceedings. However, if the parties prefer more certainty, they may wish to deal with it in the arbitration clause, for example, by specifying that questions of document production will be governed by the International Bar Association's Rules on the Taking of Evidence in International Commercial Arbitration. Alternatively, they may prefer to specify that the Prague Rules will apply. These are more recent and less tested than the IBA Rules and are generally perceived as taking a more civil law approach towards procedure and, in particular, document production. Either way, ensure you are aware of what you are agreeing to if either are to be adopted.

Choice of Law

Choice of law clauses are separate from arbitration clauses, since these set out the applicable or governing law regulating the parties' rights and obligations, by which substantive questions are to be judged. In contrast, an arbitration clause sets out the mechanism by which a dispute is to be resolved. However, choice of law clauses are often combined with arbitration clauses, so parties may have to consider this when drafting the arbitration clause. Also, in some circumstances, it may be important for parties to appreciate the distinction between the governing law of the contract, the procedural law of the arbitration, and the law applicable to the arbitration clause.

Parties should select an appropriate governing law carefully. The governing law of a contract can be pivotal not only to its formation and validity but also to the question of whether disputes arising under or in connection with the contract can be submitted to arbitration and what remedies can be awarded by the arbitrators. It is always advisable, therefore, to specify the governing law when drafting the contract. Where the parties do not select a governing law, the choice will be made for them by the arbitrators. The procedural law in an arbitration is different from the governing law of the contract: this is the law by which the arbitration will operate, such as the UNCITRAL Model Law. The procedural law is normally the law relating to arbitration in the seat of the arbitration. It is not advisable to specify in the arbitration clause a different procedural law from the procedural law in the seat of the arbitration and, if possible, align the governing law and the procedural law and seat.

Under the widely accepted principle of separability, an arbitration clause in a contract is considered to be separate from the contract in which it resides. This means that the arbitration clause survives termination of the contract and allows any claims arising out of that termination to be referred to arbitration. It is generally assumed that where no separate choice of law for the arbitration clause is made, the governing law of the contract as a whole is also the governing law of the arbitration clause. However, difficulties can arise where the governing law of the contract is different to the seat of the arbitration. In those circumstances, disputes can arise as to what the governing law of the arbitration agreement is. In order to avoid such disputes, it is sensible to either include in the arbitration agreement a governing law provision where you want the governing law of the arbitration agreement to follow the law of the seat, or to extend the contract governing law provision so that it also covers the arbitration agreement where you want the governing law of the contract to apply.

Scope and Validity of the Arbitration Clause

Generally, arbitration clauses will cover all disputes arising out of the relevant contract, and courts and arbitral tribunals will not favour arguments that say that certain disputes do not fall within the wording of the clause as a matter of construction. Also, another result of the principle of separability discussed above is that an arbitration clause will remain valid even if the contract in which it is found is alleged to be invalid. Moreover, there are limited grounds to challenge the validity of an arbitration clause itself. The New York Convention provides that the courts of a signatory country must uphold an arbitration clause unless the clause is null and void, inoperative, or incapable of being performed.

Choice of Language

It is advisable to provide for the language of the arbitration, as this will determine the language of the written and oral submissions in any hearing. If not specifically provided for, the tribunal will decide the language. The choice of language can significantly affect the cost and efficiency of the arbitration, as it determines the need for translation and interpretation services.

Multiple Related Contracts

One of the disadvantages of arbitration is that arbitrators, unlike judges, do not have the authority to join additional parties to the arbitration or consolidate related arbitrations without the additional parties' consent. Where there are inter-related contracts, and the parties want any related disputes to be heard together or want the ability to join into the arbitration the various parties to the different contracts, it is possible to cater for that. However, advice on the drafting should always be sought, as this is a complex area that requires careful consideration of the contractual relationships and the applicable rules.

Confidentiality

If confidentiality is a concern, it is sensible to insert a confidentiality clause, as the approach to confidentiality can vary between different arbitral institutions and different jurisdictions. A clause which specifically addresses the arbitration is advisable, as opposed to relying on more general confidentiality provisions that apply to the underlying contract. Several of the institutions provide standard wording for such clauses. Alternatively, choose arbitration rules, such as the SIAC Rules, which have express confidentiality provisions.

Waive the Right to Appeal

Parties can agree to waive the right to appeal on a point of law in order to ensure that an award is final and binding, to the extent the waiver is permitted by the laws of the relevant state. Certain institutional rules, such as the ICC and LCIA rules, also include this waiver. This can be an important consideration for parties who want a final and conclusive resolution of their dispute without the delay and expense of appellate proceedings.

Practical Considerations and Best Practices

In addition to the key elements discussed above, there are several practical considerations and best practices that parties should keep in mind when drafting arbitration clauses. It is essential to ensure that the clause is clear, unambiguous, and comprehensive to avoid any potential disputes about its interpretation. The clause should be drafted in a way that is consistent with the overall commercial intent of the parties and the nature of the underlying contract. Parties should also consider the potential for multi-party and multi-contract disputes and include provisions that address these scenarios if necessary. It is always advisable to seek expert legal advice when drafting arbitration clauses, particularly in the context of international commercial contracts, to ensure that the clause is enforceable and effective.

Furthermore, parties should be aware of the potential costs and time implications of arbitration and should consider whether alternative dispute resolution mechanisms, such as mediation or expert determination, might be more appropriate for certain types of disputes. The arbitration clause should also be reviewed and updated regularly to ensure that it remains fit for purpose and reflects any changes in the parties' commercial relationship or the applicable legal landscape.

Arbitration Clause Templates

Below are five comprehensive arbitration clause templates that can be adapted to suit various contractual scenarios. These templates cover institutional arbitration with leading institutions, ad hoc arbitration, and clauses for multi-party and multi-contract situations. Each template includes the essential elements and can be modified to fit the specific needs of the parties.

Template 1: ICC Institutional Arbitration Clause

All disputes arising out of or in connection with the present contract, including any question regarding its existence, validity, or termination, shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with the said Rules. The seat of arbitration shall be Paris, France. The language of the arbitration shall be English. The governing law of the contract shall be the laws of England and Wales. The arbitral award shall be final and binding on the parties, and judgment upon the award may be entered in any court having jurisdiction thereof.

Template 2: LCIA Institutional Arbitration Clause

Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity, or termination, shall be referred to and finally resolved by arbitration administered by the London Court of International Arbitration in accordance with the LCIA Arbitration Rules, which Rules are deemed to be incorporated by reference into this clause. The number of arbitrators shall be one. The seat of arbitration shall be London, United Kingdom. The language of the arbitration shall be English. The governing law of the contract shall be the laws of England and Wales.

Template 3: SIAC Institutional Arbitration Clause

All disputes arising out of or in connection with this agreement, including any question regarding its existence, validity, or termination, shall be referred to and finally resolved by arbitration administered by the Singapore International Arbitration Centre in accordance with the Arbitration Rules of the Singapore International Arbitration Centre for the time being in force, which rules are deemed to be incorporated by reference into this clause. The seat of the arbitration shall be Singapore. The Tribunal shall consist of three arbitrators. The language of the arbitration shall be English. The governing law of this agreement shall be the laws of the Republic of Singapore.

Template 4: Ad Hoc Arbitration Clause (UNCITRAL Rules)

Any dispute, controversy, or claim arising out of or relating to this contract, or the breach, termination, or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force. The appointing authority shall be the Secretary-General of the Permanent Court of Arbitration. The number of arbitrators shall be three. The place of arbitration shall be Geneva, Switzerland. The language to be used in the arbitral proceedings shall be English. The governing law of the contract shall be the substantive law of Switzerland. The award shall be final and binding on the parties.

Template 5: Multi-Party / Multi-Contract Arbitration Clause

All disputes arising out of or in connection with this contract and any related agreements or instruments, including any question regarding its existence, validity, or termination, shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with the said Rules. The seat of arbitration shall be Hong Kong. The language of the arbitration shall be English. The governing law of the contract shall be the laws of the Hong Kong Special Administrative Region. The parties agree that any arbitration commenced under this clause may be consolidated with any arbitration commenced under any other agreement between the parties or their affiliates, provided that the disputes arise out of the same transaction or series of transactions. The parties also agree that any third party that is a party to any such related agreement may be joined to the arbitration with the consent of all parties.

The arbitration clause is a critical component of any international commercial contract. By carefully considering the issues outlined in this guide and drafting a clear, comprehensive, and tailored clause, parties can significantly enhance the effectiveness and efficiency of their dispute resolution mechanism and minimise the risk of costly and time-consuming disputes. The templates provided offer a solid foundation, but legal advice should always be sought to ensure that the clause is appropriately adapted to the specific circumstances of the contract and the parties' commercial objectives.