10 Tips for Drafting an Effective Arbitration Clause

17 December 2022

Arbitration is a form of Alternative Dispute Resolution that has gained widespread recognition as an effective means of resolving disputes. In the event of a dispute, the arbitration clause addresses the parties’ legal rights to initiate the arbitration proceeding before a tribunal and decides the course of the arbitration proceeding. The wording of the arbitration clause is therefore crucial for the smooth functioning of the arbitration proceeding.

Listed below are 10 tips for drafting an effective arbitration clause:

Tip 1: Choose the appropriate arbitral institution

There are several arbitration institutions, like the SIAC, LCIA, ICC, AAA, etc., each with its own rules and procedures. It is crucial to consider factors such as the cost, expertise, and reputation of the institution when selecting one.

Tip 2: Incorporate the recommended Arbitration Clause

Begin with the arbitration clause recommended by the chosen arbitral institution. As any institutional arbitration takes place according to the rules of the institution concerned, these rules will generally be adequate to guide the process from beginning to end. In any case, recommended arbitration clauses by major arbitral institutions are safe to use as a template because they contain the clear, basic text of an arbitration clause and everything that the parties must adapt.

For example, the London Court of International Arbitration (“LCIA”) recommends the following 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 under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.

The number of arbitrators shall be [one/three].

The seat, or legal place, of arbitration shall be [City and/or Country].

The language to be used in the arbitral proceedings shall be [ ].

The governing law of the contract shall be the substantive law of [ ].”

Tip 3: Clearly define the scope of the arbitration clause

Arbitration clauses that are poorly drafted may deprive the tribunal of jurisdiction over the dispute. The parties are required to make sure that the arbitration clause covers all disputes that may arise between the parties, including those related to the interpretation, performance, or breach of the contract. Less inclusive language welcomes debate about whether a particular dispute is arbitrable.

Tip 4: Determine the number of arbitrators

The parties have the autonomy to agree on the number of arbitrators. Generally, it is appropriate to have three arbitrators when conflicts are likely to be complicated. A single arbitrator may be more suitable and cost-effective if the dispute is likely to be less complicated.

Tip 5: Select the Seat/Place of Arbitration

The law of the seat governs the arbitral proceedings. It is therefore important for the parties to choose a suitable pro-arbitration country that meets the needs of the modern world and is a party to the New York Convention and the other international conventions. As the seat of arbitration has several legal consequences, it is important that it be determined after careful evaluation.

Tip 6: State the applicable law

The clause should specify the law that will be applicable to the arbitration agreement. This can help to ensure that the arbitration is conducted fairly and in accordance with the parties’ intentions. The law governing the arbitration agreement, which determines its validity and scope, can differ from the governing law of the substantive contract.

Tip 7: Select the language of arbitration

Consider which language will be most convenient for the parties and any potential witnesses. Parties are free to choose the language of arbitration, but if they are of different nationalities, both parties must be able to speak and write in that language. Choosing a language that is known by both parties will save money, as you will not need to spend it on translators.

Tip 8: Make the clause precise

All terms used in the arbitration clause will be interpreted by the arbitral tribunal, so they must be precise and adequate to fulfill the intentions of the parties. When interpreting arbitration clauses, arbitral tribunals will concentrate on the wording used in the arbitration agreement itself. For example, common words like “shall,” which has a mandatory meaning, and “may,” which has an optional meaning, shall be used appropriately because, when parties agree to resolve any disputes between them by arbitration, they intend such recourse to arbitration to be mandatory rather than optional.

Tip 9: Determine the need for a multi-tiered dispute resolution clause

The parties to an arbitration agreement may decide that they want to try a non-binding process with a third party’s assistance, like mediation, before taking any disputes to arbitration. Such multi-tiered clauses have the benefit of requiring the parties to fully investigate the possibility of an amicable settlement before initiating arbitral proceedings. As the clause involves different processes, it is critical that the multi-tiered clause have clear trigger points for the separate stages mentioned in the clause.

Tip 10: Determine whether there is a need for joinder or consolidation

Parties bound by multi-contracts run the danger of having multiple arbitrations involving the same or very similar facts handled by various tribunals when disputes occur. Decisions resulting from this may clash, increase costs, and cause delays. Consolidation (i.e., the merging of separate arbitrations arising out of the same or related contracts into a single set of proceedings) and joinder (i.e., the addition of a third party to an existing arbitration) must be expressly permitted by each interrelated contract’s arbitration agreement if multi-contract disputes are at play. It is important to note that most arbitral institutions have consolidation and joinder provisions.

Conclusion

By following the tips mentioned above, you can make sure that the arbitration clause provides a clear and concise framework for the arbitration process and that the dispute is arbitrated effectively according to your specifications.

‘Chapter 2. Agreement to Arbitrate’, in Blackaby Nigel , Constantine Partasides, et al., Redfern and Hunter on International Arbitration (Sixth Edition), pp. 71 – 154.
https://www.pinsentmasons.com/out-law/guides/drafting-an-arbitration-clause
https://www.acerislaw.com/drafting-an-arbitration-clause-in-2021