When draftign an arbitration agreement one must ensure to keep in mind the purpose of the selection and the major aspects that can be reflected when drafting one.
An arbitration agreement is a contract in which parties agree to resolve disputes through arbitration rather than through litigation in court. Arbitration is a private and binding method of dispute resolution, where an impartial third party, known as an arbitrator, is chosen to review the case and make a decision that is enforceable by law.
When drafting an arbitration agreement the below aspects need to be considered:
Scope of Arbitration when Drafting an Arbitration Agreement
The scope refers to the types of disputes that will be resolved through arbitration. It’s important to:
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- Be broad or specific: You can draft a broad arbitration clause that covers “any and all disputes” arising from or related to the agreement, or you can limit the scope to specific types of disputes (e.g., payment issues, contract interpretation, etc.).
- Avoid ambiguity: Clearly specify what is covered under arbitration and what is excluded. For example, some matters like criminal issues or regulatory compliance may not be suitable for arbitration.
Arbitration Rules and Governing Law
- Institutional Rules:
- If you opt for institutional arbitration (such as through ICC, DIAC, SIAC, HIAC or LCIA), you agree to follow their procedural rules. Each institution has its own set of rules governing aspects like appointment of arbitrators, case management, and timelines.
- Ad hoc arbitration: You may prefer to establish your own rules for arbitration, which is more flexible but lacks the structure provided by institutions.
- Governing Law:
- It’s crucial to specify which jurisdiction’s substantive law (i.e. UAE Law or French law, etc) will govern the arbitration agreement and the contract itself. This can have a significant impact on how disputes are resolved, as laws can vary across jurisdictions.
- Distinguish between the governing law of the contract (i.e., what law governs the rights and obligations of the contract) and the procedural law of the arbitration (i.e., what law governs the arbitration proceedings).
Arbitration Venue and Language
- Venue:
- The “seat” or venue of arbitration determines the procedural framework and can affect enforceability. For example, choosing a country with a favorable legal environment for arbitration (like Switzerland, Singapore, or the UAE) can help ensure the award is easily enforced.
- The venue need not be the physical location of hearings, but it defines the jurisdiction whose courts may supervise the arbitration.
- Language:
- Arbitration proceedings should be conducted in a language both parties understand, which avoids the need for expensive translation and ensures clarity in communication. It’s especially important when parties from different countries are involved.
Selection of Arbitrators when Drafting an Arbitration Agreement
- Number of Arbitrators:
- You can choose to have a single arbitrator for simplicity and lower costs, or a panel of three arbitrators (often preferred for complex disputes). With three arbitrators, each party typically selects one arbitrator, and the two selected arbitrators choose the third.
- Qualifications:
- Specify any required qualifications for arbitrators, such as industry-specific knowledge or legal experience. This ensures that arbitrators have the necessary expertise to resolve disputes efficiently.
- Impartiality and Independence:
- Ensure that arbitrators are neutral and independent of both parties to maintain fairness. Arbitration rules often include provisions to challenge an arbitrator’s appointment if their impartiality is questionable.
Confidentiality
- Unlike court proceedings, arbitration can be kept confidential, which is often a major advantage for businesses. Confidentiality clauses ensure that:
- The proceedings, documents, and final award remain private.
- This is particularly beneficial for sensitive disputes, such as those involving trade secrets, intellectual property, or reputational concerns.
Arbitration Costs
- Cost Allocation:
- Arbitration can be expensive, especially if institutional rules apply. It’s important to address how costs will be shared, including administrative fees, arbitrator fees, and legal fees.
- You can specify whether costs are split evenly between the parties or if the “loser pays” principle applies (i.e., the losing party bears the full costs).
- Advance Payment:
- Institutions often require advance deposits to cover costs. Make provisions for how and when such payments are made.
Interim Relief
- Interim relief refers to temporary measures taken to preserve the status quo or prevent irreparable harm until the arbitration is concluded (e.g., freezing assets or preventing the sale of disputed goods).
- Courts or Arbitrators:
- Specify whether parties can seek interim relief from national courts, arbitrators, or both. Some arbitration rules empower arbitrators to grant interim relief, while in other cases, courts might be the better option.
Enforceability of the Award when Drafting an Arbitration Agreement
- New York Convention:
- Ensure the arbitration clause and process conform to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This international treaty facilitates the enforcement of arbitration awards across over 160 countries.
- Parties should be aware of the legal framework in jurisdictions where they may need to enforce the award (especially if a party operates or holds assets in multiple countries).
- Local Laws:
- The enforceability of an arbitration award might vary depending on local laws. For instance, in some countries, public policy exceptions may prevent enforcement, so it’s vital to ensure the arbitration agreement doesn’t conflict with the national law of those countries.
Waiver of Rights to Appeal
- Arbitration is designed to be a final and binding dispute resolution method. Generally, there are very limited grounds for appeal (e.g., if there was fraud, corruption, or serious procedural irregularity).
- Including a waiver of the right to appeal can prevent prolonged disputes. However, be cautious about overriding statutory protections that allow for some limited recourse to courts (such as challenges for serious legal errors).
Time Limits when Drafting an Arbitration Agreement
- Arbitration should be faster than litigation, but without time limits, the process could drag on. Consider:
- Setting a time limit within which arbitration must be initiated (e.g., within six months after a dispute arises).
- Establishing time frames for key steps in the arbitration, such as the exchange of documents, hearings, and final award issuance.
Finality and Binding Nature
- Arbitration is meant to provide finality. The arbitration clause should clarify that the arbitrator’s decision is final and binding on both parties. Unlike court decisions, arbitration awards are not usually subject to appeal, and this finality is a key benefit of arbitration.
Arbitration versus Litigation Clause
- It’s essential to clarify that arbitration is the preferred method of dispute resolution, and courts will only be involved in very specific circumstances (e.g., for interim measures or the enforcement of the arbitral award).
Multi-tier Dispute Resolution Clauses
- Some arbitration agreements include a multi-tier dispute resolution process, where the parties must attempt other forms of dispute resolution (such as negotiation or mediation) before proceeding to arbitration. This can help resolve disputes amicably before resorting to arbitration.
Joinder and Consolidation
- Consider whether the arbitration agreement allows for the joinder of additional parties to the arbitration or the consolidation of multiple arbitration proceedings. This is important when there are multiple related contracts or parties.
Conclusion to When Drafting an Arbitration Agreement
When drafting an arbitration agreement, it’s important to strike a balance between clarity, fairness, and enforceability. An effective agreement helps avoid misunderstandings and ensures that the arbitration process runs smoothly, saving time and resources for both parties.
Arbitral Institutions have a model clause in their websites that can be effectively used as most aspects have default options under respective rules of each institution. Their inclusion would imply minor clarifications such as langauge, number of arbitrators, venue, or governing law. Explore working from their model clauses if you know the institution that you would like to handle the dispute.
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We trust that the above is of assistance when considering arbitration. Expert advice is recommended at an early stage of the transaction building and contract drafting.
For more information about UAE law you can visit all our publications in this link as well as the videos of our director Maria Rubert.
**This publication is not intended as legal advice and rather as general information.