How to draft an arbitration agreement

Arbitration is an alternative means of dispute resolution whereby parties entrust an arbitral tribunal – via an arbitration agreement – with the authority to decide their dispute.

Arbitration agreements may be inserted in a variety of contracts, typically B to B (business to business) contracts such as contracts for the sale of goods and services, share purchase agreements (SPAs), joint venture agreements, licensing agreements, gas sale agreements, framework agreements, dealership agreements, etc. as well as investment treaties. An agreement to arbitrate may also be reached after a dispute has arisen.

Because lack of care in their drafting can cause increased delays and costs, arbitration agreements must be cautiously reviewed. The following sections provide a general overview of the issues involved in drafting an arbitration agreement. However, as each case has its own specific considerations, it is recommended that expert legal advice is obtained before committing to an arbitration agreement.

Identifying the seat of the arbitration

The seat of the arbitration is where the proceedings take place, or rather where they are considered to take place legally. In practice, parties may choose to physically hold hearings in other locations and the tribunal may decide the case from a variety of physical locations. The place at which hearings or deliberations happen does not impact on the legal “seat” of the arbitration.

Identifying the arbitration’s seat in an arbitration agreement is essential because it will determine the underlying legal framework of the arbitration and its procedure, as well as the supervisory jurisdiction of the courts of the seat. It may also determine the law applicable to the arbitration agreement in the absence of an express choice (see for example, the UK Supreme Court’s decision in Enka v Chubb, [2020] UKSC 38 or the Paris Court of Appeal’s decision of 23 June 2020, No. RG 17/22943). For example, if an arbitration is legally “seated” in Paris, French law will determine whether an arbitration agreement can be extended to third parties. It will also mean that subsequent annulment proceedings are heard by French courts.

Parties are therefore advised to choose a legal “seat” located in a country with a law favourable to arbitration and with courts experienced in arbitration related matters.

Importantly, the choice of seat will also have an impact on the enforceability of an award. If the seat of the arbitration is located in a signatory state to the New York Convention of 1958, the award will benefit from a favourable enforcement regime across the convention’s signatory states. For example, arbitral awards rendered in Tripoli-seated arbitrations will not be enforceable under the New York Convention of 1958 because Libya is not a signatory. However, Libyan companies may wish to choose the seat of an arbitration to which they are a party to be located in, for example, London, Paris or Geneva. In principle, this would then allow them to enforce their award in, say, the United States or any other signatory to the New York Convention of 1958, subject to the enforcement regime contained therein.

In addition, parties should be aware that some jurisdictions will be more favourable to sovereign immunity than others. In some circumstances, States may wish to rely on a defence of sovereign immunity to resist the enforcement of an award.

Making sure the parties can arbitrate their dispute

To draft a valid arbitration agreement, parties should also be conscious of the requirements imposed on specific parties or the inarbitrability of certain disputes.

Some countries may impose requirements such as a formal authorisation for State entities to enter into arbitration agreements. Others may have laws protecting consumers and therefore preventing arbitrations where consumers have not provided an express written consent, once disputes have arisen.

As regards arbitrability, it should be noted that certain jurisdictions consider disputes relating to criminal law, family law, insolvency proceedings, State entities or labour law to be within the exclusive domain of state courts. Such disputes may therefore be incapable of being decided by arbitration, i.e. they are “inarbitrable”.

Choosing between ad hoc and institutional arbitration

Institutional arbitrations are administered with the support of institutions, such as the International Chamber of Commerce (“ICC”) or the London Court of International Arbitration (“LCIA”), according to their arbitration rules.

Institutions ensure arbitral tribunals are duly constituted, for example by acting as appointing authorities and ensuring candidates disclose potential conflicts of interest. If necessary, they can also provide support during hearings and will often review awards to ensure they are clear and not blatantly unenforceable. They provide sets of rules applicable to arbitral proceedings initiated under agreements referring to them.

Therefore, when drafting an arbitration agreement, parties should choose whether they intend to resort to institutional arbitration or not. Absent such an agreement, they will be deemed to have chosen ad hoc arbitration.

Whether or not the parties should resort to institutional arbitration depends on their anticipated need for a framework and logistical support throughout proceedings. Institutions are particularly helpful to ensure arbitrations are conducted effectively, by avoiding hurdles, in particular with the appointment of arbitrators as they can act as appointing authorities.

Ad hoc arbitrations on the other hand can be more flexible. However, they can lead to extended delays, especially when the parties fail to reach an agreement on issues such as the mechanism for the arbitral tribunal’s appointment.

Where the parties decide not to resort to institutional arbitration, it may be advantageous to clearly set out a method of appointment for the arbitral tribunal in their arbitration agreement and to identify the rules applicable to the procedure (for example the UNCITRAL Arbitration Rules).

Standard rules will usually contain a model clause in their Annex. For example, the UNCITRAL Arbitration Rules recommend using the following clause:

Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules.”

They further mention that:

Parties should consider adding:

(a) The appointing authority shall be [name of institution or person];

(b) The number of arbitrators shall be [one or three];

(c) The place of arbitration shall be [town and country];

(d) The language to be used in the arbitral proceedings shall be [language]”

The key element is to set deadlines for each procedural step as the claimant may otherwise be unable to proceed with the tribunal’s constitution when confronted with a recalcitrant respondent.

Determining the number of arbitrators

Determining the number of arbitrators will be particularly important when the arbitration agreement does not refer to institutional rules, which usually contain an appointment mechanism.

Parties generally stipulate an odd number of arbitrators (typically one or three – it being specified that an odd number is notably a requirement under French law), depending on the complexity of a potential dispute and the anticipated pace at which they wish the proceedings to proceed. The number of arbitrators will influence both the cost and the duration of the proceedings.

If parties fail to determine a number of arbitrators or identify an appointing authority (in the event of not choosing institutional arbitration), they may have to resort to the support of domestic courts to appoint the arbitral tribunal, which can considerably increase the length of proceedings, as well as their cost.

Identifying the right language for the proceedings

The arbitration agreement is also an opportunity for the parties to decide the language or languages in which they wish the proceedings to take place. An early determination will save translation costs. It will also ease the selection of counsel and an arbitral tribunal with the adequate language skills.

To choose the appropriate language for an arbitration, parties should not only consider the language of the contract governing the parties’ relationship. They should also anticipate the working language of the parties throughout the contract, as it is likely to be the language of a majority of the evidence that may be submitted in the arbitration, such as letters, emails and other contemporaneous documents recording the communications between the parties.

It can also be anticipated that documents in a certain language will not require translation. This can further save costs throughout arbitration proceedings, should these materialise.

Opting out of specific mechanisms

Where parties choose to resort to institutional arbitration, they should anticipate that they may be subject to specific mechanisms aiming at facilitating an efficient conduct of the proceedings, unless they opt out from them.

For example, under the most recent rules of the ICC, expedited arbitration proceedings will automatically apply to disputes under 3 million USD, unless the parties agree otherwise. Likewise, under the rules of the LCIA, parties may choose to opt out from emergency arbitration provisions so that they may instead approach the Courts of the seat for interim measures or relief.

Anticipating pandemic-related hurdles

Parties should be prepared to consider issues such as health and safety restrictions, impediments to the transmission of physical documents and overall restrictions of in-person meetings, which may affect the efficiency of arbitration proceedings.

To do so, parties should avoid imposing mandatory paper notifications or in person meetings in the cooling off provisions of dispute resolution clauses. Remote meetings should be made possible to avoid delays.

Parties should also avoid resorting to domestic courts by making sure that their arbitrator appointment mechanism is well-designed. In many instances, this involves considering the involvement of an appropriate appointing authority.

Ahead of the commencement of the arbitration proceedings, parties can also ensure that electronic communications and submissions and virtual hearings are allowed throughout the arbitration. A number of institutions, including the ICC have published guidance notes to assist parties (see here for example).

An arbitral institution offering digital and logistical support can be of assistance in such circumstances.

Early in the pandemic, institutions have issued guidance notes for parties seeking to make use of their services and adapted their arbitration rules. For example, several rules have now granted arbitral tribunals the authority to impose entirely virtual proceedings, after consulting the parties.

Such developments show that arbitration can be more resilient than court litigation.

Ensuring confidentiality of exchanges

Not all jurisdictions or institutional rules will ensure default confidentiality of arbitration proceedings. If confidentiality is important for the parties, they should consider making this clear in their arbitration agreement if this is not something already provided for in the chosen arbitration rules.

Other things worth considering in a dispute resolution clause

In addition to an arbitration agreement, dispute clauses can also provide for pre-litigation mechanisms. Before resorting to arbitration, parties may for example choose that they wish to have an attempt at settling or mediating their dispute by adding a cooling off period in their arbitration agreement.

Parties should also consider expressly choosing the law applicable to the arbitration agreement, as that can avoid unintended consequences or expensive satellite litigation on the issues later down the line. Separate from the law applicable to the arbitration agreement, parties should also choose the law applicable to the dispute. Such a law will be applied by the arbitral tribunal and used to interpret the contract(s) governing the relationship between the parties and underlying obligations. For example, a contract arbitrated in a Paris seated arbitration may be subject to English law where parties elect to have their dispute governed by English law.