An arbitration clause can be defined as a provision in an underlying commercial contract, through which the parties involved in a particular transaction, agree to settle any conflict or dispute that may arise from or related to the transaction by means of arbitration. Most commercial contracts or agreements these days inexorably contain an arbitration clause. The importance of a well drafted arbitration clause especially in joint venture agreements has been emphasised in the last three articles in this column. In this article, we highlight some of the fundamental elements that must be considered carefully when drafting an international arbitration clause.
However, let us first highlight the issue of ambiguity in arbitration clauses. An arbitration clause is considered ambiguous if the parties do not express clearly or sufficiently clearly for that matter that, in the case of conflict or any dispute arising out of their transaction that the settlement shall be effected through arbitration. Given that, arbitration is only possible if there is consent by the parties, to the extent that, an arbitration clause is ambiguous, then, there is no agreement to arbitrate.
Thus, an ambiguous arbitration clause squanders the opportunity to arbitrate. This was the case in one case, where an arbitration clause provided that: "In case of dispute, the parties undertake to submit to arbitration but in case of litigation the Tribunal de la Seine shall have exclusive jurisdiction." There is no way an arbitration tribunal can go ahead with arbitration arising from such an ambiguous clause for there is no guarantee the resultant award will be upheld.
In the remaining parts of this article, we deal with key elements of a well drafted arbitration clause. These elements are:
The scope of the arbitration clause
Unless there are specific reasons for excluding all disputes in terms of an international contract, it is advisable to ensure that, the clause covers all conceivable disputes that may arise in connection with the contract. Such a clause would look like this:
All disputes, claims, controversies or disagreements relating to, arising out of or in connection with this contract/agreement (this includes its formation, existence, validity, enforceability, performance, termination, interpretation or breach thereof), or the subject matter of this contract/agreement, shall be finally resolved by arbitration.
Let us illustrate why such a comprehensive clause is worthy of it: We shall attempt to examine each clause seriatim.
"All disputes, claims, controversies or disagreement." By drafting the clause in this manner, it helps to ensure that, there is little possibility of a recalcitrant respondent party arguing that the issue that are the subject of the request for arbitration are not covered by the arbitration clause. For instance, it is possible for a party to claim that, the "claims" are not "disputes." Arguing over such meaning will definitely cost parties resources and it is therefore advisable to avoid such arguments.
"Relating to, arising out of or in connection with." If a clause is formulated to read "arising under," there is a possibility of it being construed to mean that, only claims encompassing claims related to the parties’ contractual relations are covered. Thus, by including "relating to" and "in connection with," the clause covers tort, quasi contract, statutory and any other non – contractual claims are brought under the ambit of the arbitration clause.
"Formation, existence, validity, enforceability, performance, termination, interpretation or breach." This type of language makes it very clear that, all disputes relating to the parties’ contractual relationship shall be subjected to the arbitration clause. This ensures that, such issues as fraudulent inducement or improper termination are covered.
"Subject matter." This formulation helps to further broaden the scope of the arbitration clause and ensure that, any disputes regarding the formation and validity of the underlying contract will also fall within the scope of the arbitration clause. It is possible to carve out certain types of disputes. However, such a clause must be very carefully worded. If not so, it will lead to jurisdictional challenges as regards the applicability of the clause to particular claims. This will obviously occasion delays and additional expenses. While at it, one should be aware of the applicable mandatory rules of national law that may make some claims not arbitrable.
"Shall be finally resolved by arbitration." The importance of these words can be deduced from a recent New York case. The relevant arbitration clause provided that "All disputes ... may be resolved by final and binding arbitration pursuant to the voluntary arbitration rules of the AAA." The plaintiff argued that, the words "may be resolved by final and binding arbitration" clearly made the arbitration optional and not mandatory and therefore, the parties could resolve the conflict in court. Finally, the court did hold that "may be resolved" did give the parties an option not between court and arbitration, but between going to arbitration and doing nothing at all. Although the court came to the right decision, the parties did take long time and incurred extra expenses than would have been necessary if the clause had been drafted carefully.
Choice of the arbitral institution
Today, there are numerous competent arbitral institutions that may be selected by the parties to conduct the arbitration proceedings. We are proposing to set up one in the Bahamas to aid the administration of the justice system in the Bahamas. However, it is important to have in mind that, the choice of a particular arbitration institution affects both the length and expense involved in the proceedings and the outcome. This is so because, different arbitral institutions have differences in procedural timetable, the powers of the arbitrator, the scope of discovery, availability of interim relief, costs of arbitration and the choice of the arbitrators in the case of default by one party. Since most arbitral institutions provide model clauses that may be used to incorporate them in the arbitration clause, it is advisable where appropriate, to use these model clauses. It is true that, the parties may decide to amend the institutional rules. However, if they decide to do so, they are advised to consult such an arbitral institution and those experienced in arbitration. We urge parties in the Bahamas to seriously consider using arbitration in resolving their disputes considering the inherent advantages in arbitration over litigation. Arbitration saves time and cost. Litigation is time-consuming and money-consuming. Arbitration is an informal process or resolving disputes and is conducted under more relaxed atmosphere. Litigation is highly stressful and morbidly unpredictable. Arbitration preserves and enhances existing business and commercial relationship. Litigation is very often contentious and acrimonious and embitters and damages business and commercial relationships and involves a daunting procedural technicalities. Why don’t you consider arbitration today and you will see the benefits no doubt.
Clement Chigbo [esq],LLB[Hons], LLM[London], L.E.C, B.L, Dip.Lat, MCIArb, a lawyer is a Member of the Chartered Institute of Arbitrators [U K]. He practises as a registered associate with the law firm of C F Butler & Associates, Nassau,The Bahamas. Mr Chigbo is also a doctoral candidate and a tutor in law at the University of Aberdeen, U K. The above article is a joint collaboration between Mr Chigbo and Nwaniki Gachuba LLB, LLM, LLM, MSc
- Austin DWI - New York DWI