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New Year’s resolutions: drafting arbitration clauses

It’s that time of year again…dry January, healthy eating, gym, early nights. None of that will last forever (thank goodness) but there are some new year’s resolutions that may yield more enduring beneficial results. Drafting arbitration clauses is something that tends to be left until the last minute and performed at speed: it is hardly surprising, therefore, that defective or even pathological arbitration clauses are commonplace. I was very struck in 2013 by an interesting article by Jonathan Choo and Shaun Lee (then both at Olswang) suggesting that around 30-35% of Singapore International Arbitration Centre (SIAC) cases involved a clause that was defective in some way. That is a lot of defective clauses. The problem is, of course, that for a recalcitrant respondent, a defective arbitration clause is the gift that keeps giving – from delays in appointments right through to jurisdictional disputes and resisting enforcement. So… just in case your new year’s resolutions list is lacking on the arbitral front, I offer the following thoughts for consideration next time a draft arbitration clause crosses your desk.

Resolution 1

Make a conscious and thought-out choice of arbitration.

The dispute resolution clause tends to get left to the end (the archetypal “midnight clause”), but don’t sleep-walk into an arbitration clause. Consider carefully whether arbitration is the best choice. In some cases, litigation may be simpler (for example, if you wish to retain an option of going for summary judgment, or if there may be a need to bring third parties into a dispute). Once you’ve opted for arbitration, apply a similarly disciplined approach to the choice of seat or any arbitral institution. If opting for an overseas seat, ensure you’ve understood any local law provisions that may affect the enforceability of the arbitration agreement; for example, some jurisdictions require arbitration agreements to be signed or contained in a separate document.

Resolution 2

Think about enforcement.

You have probably chosen arbitration because of the New York Convention and the ability easily to enforce awards. But make sure you have looked into the jurisdictions in which you might be called upon to enforce, and whether there are any local law provisions that might affect the enforceability of your arbitration agreement. If the local law at the place of enforcement does not recognise the validity of your clause (because it isn’t signed, say), then the chances are that you will be faced with a jurisdictional defence to enforcement at a later stage.

Resolution 3

Be clear.

Which disputes are to be arbitrated? Do you need to carve-out any type of dispute? All arbitration clauses need to be as clear as possible. This is particularly so in the case of more complex clauses, such as escalation clauses or carve-outs, where jurisdictional and other issues can easily arise. Clarity is key. Easier said than done, but still worth saying.

Resolution 4

Look at the clause in context.

Make sure that it does not conflict with other clauses in the contract, and that it makes sense in the context of the transaction as a whole. This may involve looking at other related contracts to ensure that coherent and consistent dispute resolution mechanisms are provided for. One relatively common issue arises where two related contracts contain differing provision for disputes. When a dispute arises, it is arguable that it falls within both provisions, leading possibly to a race to commence arbitration or litigation, or jurisdictional or enforcement disputes. The English courts have adopted a robust approach to such situations, and will seek to identify the contractual “centre of gravity” of the relevant dispute; however, this will involve a close weighing of various aspects of any dispute and the outcome may be difficult to predict. Where a contract forms part of a larger transaction, particularly where third parties are involved, ensure that all the dispute resolution mechanisms hang together coherently, or at least as coherently as possible.

Resolution 5

Think about tailoring the clause.

Many aspects of arbitration need to be agreed: you can be fairly sure that agreement will be easier to achieve at this stage rather than further down the line when a dispute has arisen. So consider whether there are any procedural tweaks that would be worth including. For example: if you are providing for UK-seated institutional arbitration, you may wish to exclude any applicable emergency arbitrator provisions in order to preserve the English court’s right to intervene and grant freezing injunctions. If you haven’t opted for institutional arbitration, make sure that your clause contains a workable appointment mechanism (or that you are happy, in the case of UK-seated arbitration, to default to the English Arbitration Act 1996 (AA 1996) mechanism). Exclusion of rights of appeal, service of suit provision, waiver of sovereign immunity, contractual time limits… all these merit proper thought and, if appropriate, careful drafting.

There is no such thing as a perfect arbitration clause (a recalcitrant respondent can generally be counted on to find some way of delaying or avoiding an award), but effort at the drafting stage can at least minimise such problems… virtue may be its own reward, but good drafting habits can also secure more tangible benefits for parties to arbitration. Happy new year!

20 Essex Street Karen Maxwell

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