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Arbitration is becoming increasingly common as a means of dispute resolution in commercial contracts. Often, however, little attention is given to the arbitration clause itself, which may be “boilerplate”, or which may be drafted by commercial lawyers who have little or no familiarity with arbitration.

Considerations

Many arbitral institutions provide model arbitration clauses on their websites, and these can be useful as a starting point.

In drafting an arbitration clause, there are a number of items to consider, including the following:

  • What disputes will the arbitration clause cover? It is typically advisable for the arbitration clause to be drafted as broadly as possible and to cover “all disputes, claims or controversies”.[1]
  • Will the arbitration be administered by an institution or ad hoc? Institutional arbitration is convenient, but also more expensive than ad hoc proceedings in which the procedure is decided upon by the parties and the arbitrator.
  • How will arbitration be commenced? Particularly important for ad hoc arbitrations, the clause should set out the procedure for initiating an arbitration, including any pre-requisites (for example, if the parties require mediation before either party may commence an arbitration).
  • Will there be one or three arbitrators?[2] One arbitrator is less expensive than three, but three arbitrators may have an easier time arriving at a decision in a complex dispute.
  • How will the arbitrator(s) be selected? The process for selecting an arbitrator will typically be pre-determined in an institutional arbitration. A process should be specified in an ad hoc arbitration.
  • Where will be the seat of the arbitration? Selecting a seat (i.e., where the arbitration will be conducted) will affect the law governing the procedure of the arbitration, and may differ from the law that governs the parties’ agreement.
  • Language? It is especially important to specify the language of the arbitration where the parties speak different languages.
  • Confidentiality? As discussed previously in this newsletter series, confidentiality in arbitration is not a given. The clause should clearly state if the proceedings are to be private and confidential.
  • Will the award be final and binding? While parties may wish to preserve their appeal rights for a variety of reasons, it is common for the award to be final and binding and not subject to any right of appeal.

All of the above considerations are best dealt with by the parties and their lawyers at the time of negotiating their contract. Once a dispute arises, it is much more difficult for the parties to agree on anything.

Common Pitfalls to Avoid

While there is no universally appropriate arbitration clause, and each clause should take into account the parties and their particular circumstances, there are some common pitfalls to avoid.

Problematic arbitration clauses include those which require the respondent’s agreement in order to proceed to arbitration (for example, where the parties must agree on an arbitrator and there is no mechanism to appoint an arbitrator absent such agreement); those with arbitrator qualifications so detailed and specific that it is nearly impossible to find a suitable arbitrator; and those which refer to an arbitral institution that does not exist.

I have seen these scenarios arise repeatedly and the result is almost always a court application for the appointment of an arbitrator or for direction. A well-drafted arbitration clause will prevent the need for court proceedings prior to an arbitration.