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Drafting an arbitration agreement: what to look out for

Arbitration is an increasingly popular way for businesses to resolve commercial disputes. Strictly speaking arbitration isn’t a form of alternative dispute resolution (‘ADR’). The decision of the arbitrator is binding and it’s rarely possible to pursue court action following an arbitrator’s final decision (‘award’).

We’ve written a comprehensive guide to commercial arbitration that you may find useful.

Why should you have an arbitration clause in an agreement?

Arbitration is the private, judicial resolution of a dispute by an independent arbitrator. Businesses in dispute have an array of dispute resolution methods available to them and arbitration will not be appropriate in every case.

But if you decide that you would like disputes referred to arbitration, it’s essential to include an arbitration clause in your commercial contracts. That’s because under English law arbitration agreements must be in writing.

By choosing to arbitrate you are bypassing the courts and the view is that the desire of parties to take such a significant step should be clearly stated. In addition, a carefully crafted arbitration agreement will reduce the possibility of disputes further down the line, for example, over the precise nature of the arbitration procedure you have chosen.

What does a suitable arbitration agreement look like?

It’s worth considering what a suitable agreement should look like. If the parties agree, an arbitration clause should clearly exclude the courts from having the power to resolve disputes.

As far as legally possible, arbitrators should be granted the power to decide all disputed issues that arise under the contract to which the arbitration agreement applies. A suitable arbitration clause should also specify how the arbitration process itself will be run and how any final award will be enforced. We explain in more detail below what an effective arbitration agreement should specify.

What is a pathological arbitration clause? And how could it affect you?

An unsuitable arbitration clause will be unclear and introduce an element of uncertainty into the arbitration procedure. Vague clauses in arbitration agreements are sometimes known as ‘pathological clauses’ because they can seriously disrupt the dispute resolution process. A clause that isn’t clear on issues like jurisdiction and enforcement for example, can lead to the very kind of expensive legal dispute that arbitration is designed to avoid.

In extreme cases, a pathological clause may render the entire arbitration procedure void.

Interpreting an arbitration clause that’s unclear will be the job of the courts of whichever country has jurisdiction. In England and Wales the courts will try hard to give effect to an intention to arbitrate evidenced by the existence of an arbitration agreement – except when a clause is so unclear that it introduces ‘hopeless confusion’ to proceedings.

What type of arbitration should you choose?

Arbitration is now such a well-established method of dispute resolution that various national and international bodies have developed detailed sets of rules governing how an arbitration should unfold. When drafting an arbitration clause, it’s open to the parties to cite one of these institutions as the body under which the arbitration will operate.

Institutional arbitration

So-called ‘institutional arbitration’ allows companies in dispute to take advantage of procedures and rules that have been used frequently and effectively in the past. Using institutional arbitration can however be slow and expensive. Examples of arbitral institutions include the International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), and the International Centre for Dispute Resolution (ICDR).

Ad hoc arbitration

Ad hoc arbitration on the other hand is attractive to many because of its inherent flexibility. Rather than conform to an established set of rules on procedure and enforcement, parties are free to tailor the arbitration procedure to their own specific requirements and cherry pick the rules they wish to use, discarding those they believe might be inappropriate. Note however that even ad hoc arbitrations must comply with any underlying laws of the jurisdiction in which the arbitration is held (the ‘seat’ of the arbitration).

The choice of which arbitration procedure to use is up to the parties. Each type of arbitration has advantages and disadvantages. For all its flexibility and practicality, parties may be reluctant to opt for ad hoc arbitration because there is no formal institutional support. In this type of arbitration it might be easier for an uncooperative party to delay and frustrate proceedings. And although it may be more expensive and time consuming, institutional arbitration will often result in an award that is easier to enforce and one that has more credibility than an award obtained through ad hoc arbitration.

Multi-party agreements and multi-contract agreements

As we have seen parties must agree to submit themselves to arbitration and the binding nature of a decision. If there is no arbitration clause, parties cannot be forced to arbitrate. The corollary to this is that an arbitration award will only bind parties to the arbitration agreement.

But what happens when there are more than two parties to a contract? Or if disputes arise under more than one contract?

Multi-party and multi-contract arbitration agreements are possible; indeed some of the arbitral institutions referred to above make provision for them in their procedures. But, as in litigation, multiple parties add a layer of complexity to disputes. If choosing arbitration, it’s crucial to take extra care when drafting your arbitration agreement. For example:

  • You should consider inserting a provision to the effect that two or more sets of arbitration proceedings, originating under two different contracts can be consolidated into one
  • If there is a possibility that more than two parties will end up in dispute the arbitration agreement can anticipate this by allowing for the ‘joinder’ of third parties to the arbitration so that they become involved in proceedings and will be bound by the award
  • If there are several contracts there should be a provision for appointing the same arbitrator to adjudicate disputes under all contracts.

Give the complexity of arbitrating in multi-party or multi-contract disputes it is worth considering at the contract drafting stage whether, ultimately, arbitration is an appropriate method of dispute resolution.

What you’ll need to specify in an effective arbitration agreements

An effective arbitration agreement should clearly indicate:

  • That the parties have agreed to submit disputes to arbitration
  • Whether certain types of dispute are excluded from the arbitration provisions
  • The seat of the arbitration (this is not necessarily the same as the location of the arbitration hearings but it will normally determine the law governing the arbitration and the laws applicable to enforcing the arbitration award)
  • How many arbitrators will be appointed and what expertise they should have
  • Whether the arbitration will be institutional or ad hoc. If institutional arbitration is chosen it’s important to accurately name the chosen institution
  • How confidential proceedings are to be
  • Whether the award can be challenged

What next?

If you need advice on arbitration agreements or procedure we are ready to help. Call us on 0800 689 1700, email us at enquiries@hjsolicitors.co.uk, or fill out the short form below with your enquiry.

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