Many parties fail to realize that the wording of an arbitration clause is important for arbitration to function smoothly. In practice, one may observe, however, recurrent scenarios where arbitration clauses contain defective wording and, thus, are subject to unnecessary incidents and procedural debates. Such clauses are called “pathological clauses“. They are defined in Fouchard, Gaillard, Goldman on International Commercial Arbitration as follows:[1]
It denotes arbitration agreements, and particularly arbitration clauses, which contain a defect or defects liable to disrupt the smooth progress of the arbitration. Arbitration agreements can be pathological for a variety of reasons. The reference to an arbitration institution may be inaccurate or totally incorrect; the agreement may appear to allow submission of disputes to arbitration to be optional; it may contain a defective mechanism for appointing arbitrators in that, for example, the chosen appointing authority refuses to perform that function; alternatively, the agreement might itself appoint arbitrators who have died by the time the dispute arises. The agreement may stipulate that the tribunal is to comprise three arbitrators where the dispute involves three or more parties whose interests differ; it may impose impracticable conditions for the arbitral proceedings (such as unworkable deadlines), or provide that certain issues (such as the validity of the contract) are not to be dealt with by the arbitrators, despite the fact that such issues are closely related to the dispute which the arbitrators are called upon to decide.
Below, we propose ten recommendations in drafting arbitration clauses in order to avoid procedural incidents that will undermine the timely, efficient resolution of a dispute and drive up the costs of dispute settlement via arbitration.
Recommendation No. 1: Start with Standard Arbitration Clauses Proposed by Arbitral Institutions
It is typically safe to use standard arbitration clauses proposed by major arbitral institutions as a template. These standard clauses contain clear, basic text of the arbitration clause that is to be adapted by the parties to the circumstances of their contract, if needed.
For example, the standard ICC arbitration clause reads as follows: “All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”
In turn, the standard LCIA arbitration clause reads as follows: “Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause. The number of arbitrators shall be [one/three]. The seat, or legal place, of arbitration shall be [City and/or Country]. The language to be used in the arbitral proceedings shall be [ ]. The governing law of the contract shall be the substantive law of [ ].”
Finally, the SCC proposes the following basic standard clause:
Any dispute, controversy or claim arising out of or in connection with this contract, or the breach, termination or invalidity thereof, shall be finally settled by arbitration in accordance with the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce.
Recommended additions:
The arbitral tribunal shall be composed of three arbitrators/a sole arbitrator.
The seat of arbitration shall be […]. The language to be used in the arbitral proceedings shall be […]. This contract shall be governed by the substantive law of […].
Recommendation No. 2: Use Terms Precisely
All terms used in the arbitration clause are important, as those terms are going to be interpreted by the arbitral tribunal. By interpreting arbitration clauses, arbitral tribunals will attach primordial importance to the text of the clause itself. They will look at what the parties actually agreed to, not at what they could have agreed to, but ultimately did not, agree. For example, there is a considerable difference between the terms “shall” and “may”. The former has mandatory significance, the latter only an optional one. Wording should be precise.
Recommendation No. 3: Keep the Arbitration Clause Simple and Non-Ambiguous
The best-drafted arbitration clauses are ones that are simple, precise and non-ambiguous. This means that all terms are clear and evident and, thus, cannot be seriously challenged. For example, ambiguity is created when the arbitration clause states in one sentence that the dispute shall be resolved by a sole arbitrator, but in another sentence specifies that “each arbitrator shall be independent and impartial”. What is ambiguous in this particular example is that it is difficult to see whether the intention of the parties was to have only one arbitrator or a panel of arbitrators to rule upon an eventual dispute.
Recommendation No. 4: The Ambit of the Arbitration Clause Matters
The ambit, or scope of application, of the arbitration clause relates to issues and disputes that are covered by the clause and, thus, can be resolved via arbitration. Here again, the wording used in the arbitration clause is important. Although parties can agree to arbitrate specific contract claims only, they are also free to provide a deliberately broad scope of the arbitration agreement covering not only all disputes under a contract, but also disputes related to it, including, in some cases, non-contractual claims. In this respect, different terms such as any or all disputes “arising out of the contract”, “arising under the contract”, “related to the contract”, “in connection with the contract” are generally used. However, one should bear in mind that they have fundamentally different meanings depending on how restricted the scope of the arbitration clause is intended to be, as well as the law governing the arbitration agreement.
Recommendation No. 5: Appointing a Proper Number of Arbitrators
In their arbitration clause, the parties are free to agree on the number of arbitrators that will sit on an arbitral tribunal; usually one or three members are specified. The number of arbitrators will have a direct impact on the overall costs that the parties will need to pay for the arbitrators’ fees. If a three-member tribunal is to be appointed in a case where only a small amount of damages or receivables are at stake, the costs relating to the arbitrators’ fees may be disproportionate given the amount in dispute (even, at times, exceeding the amount in dispute).
Therefore, from a practical perspective, it is sensible to appoint a sole arbitrator, rather than a three-member tribunal, for a contract involving modest sums. Alternatively, the parties may agree on a threshold amount, for instance that disputes concerning amounts of less than USD 3 million, under which the designation of a sole arbitrator is required. Should the amount exceed this threshold, a panel of three arbitrations will be composed.
Several leading arbitral institutions, such as the ICC or the SCC, have put in place cost calculators enabling the parties’ to anticipate arbitration costs, including arbitrator fees.
Recommendation No. 6: Name the Applicable Law
The applicable, or governing law (also named the “substantive law” or the “law of the contract“), is another element parties should not forget to include in their agreement, if they wish to avoid subsequent debates after the initiation of an arbitration. Selection of an appropriate law applicable to the merits of a dispute when none is named is not an easy task to do and a number of considerations will be taken into account by the arbitral tribunal, creating legal uncertainty. The parties should be mindful that laws and legal systems provide different legal regimes for contractual clauses. For example, a force majeure clause is not interpreted in the same way under French and English law. Thus, care should be taken to select an appropriate governing law.
Recommendation No. 7: Procedural Rules Selected
The parties are free to opt either for institutional arbitration or for a purely ad hoc arbitration. It is generally a bad idea to select purely ad hoc arbitration (unless the UNCITRAL Arbitration Rules are used), since if the parties are unable to agree upon a tribunal when a dispute arises, which frequently occurs, court intervention will be required to constitute the arbitral tribunal, leading to delays and wasted time and costs.
If institutional arbitration is chosen, except for the mandatory rules of the seat of arbitration, the arbitration will be conducted under the rules of arbitration of the given arbitration institution. These rules set out a number of obligations that need to be respected regarding, for example, written submissions to be filed, the payment of advance on costs, the conduct of the hearings, the deadline to issue an award, etc. However, here again, it is fundamental that the arbitration clause contains a precise indication of the arbitration institution. For example, if the parties wish to resort to ICC arbitration, the arbitration clause should refer to the “Rules of Arbitration of the International Chamber of Commerce” correctly.
Recommendation No. 8: Place/Seat of Arbitration and Type/Venue of Hearing
The selection of the place of arbitration (also referred to as the seat of arbitration) in the arbitration clause is of importance.[2] The place/seat of arbitration has several legal consequences. It determines the place, i.e., country, where the arbitral award may face annulment proceedings initiating by a losing party and where State courts may intervene in the arbitration proceedings. In general, it is recommended to select a seat of arbitration where there will be minimal potential judicial interference in arbitration proceedings and which are considered to be arbitration-friendly. Popular seats of arbitration include Paris, London, Geneva and Singapore.
Although the annulment regime is a major concern, it is not the only one as the seat of arbitration can have an impact on other features of the arbitration, such as the language of arbitration, if the latter is not expressly indicated in the arbitration clause. For example, some States, such as Indonesia,[3] contain a default rule regarding the language in their national arbitration legislation in the sense that choosing a seat within these countries would also impose the selection of their official language as the language of arbitration, should the parties not agree otherwise.
In practice, parties usually agree on the selection of the seat of arbitration in their arbitration clauses. For example, between 2007 and 2011, in more than 76% of ICC arbitration case, the parties agreed on the place/seat of arbitration in their arbitration clause.[4] Today, this percentage reaches nearly 90%.[5] However, there are still cases where the choice of the seat of arbitration is not properly indicated.
That said, one needs to bear in mind that the place/seat of arbitration is to be distinguished from the venue of the hearing. The venue of the hearing, as the term suggests, corresponds to the place where hearings are to be conducted. Although the venue of the hearing can coincide with the place/seat of arbitration, this is not mandatory. As noted by Gary Born, “most national laws and institutional arbitration rules permit hearing and meetings in the arbitration to be conducted outside the arbitral seat, for reasons of convenience. With very few exceptions, the conduct of hearings outside the arbitral seat does not affect the location of the seat”.[6]
Recommendation No. 9: Language of Arbitration
As stated above, it is preferable that the parties include the language of arbitration in their arbitration clause, in order to avoid any subsequent procedural debates on this issue or the application of default rules contained in the legislation applicable in the seat of arbitration. Parties are free to choose whatever language they would like. The selection of the language of arbitration is of particular interest when the parties have different nationalities. For instance, it does not make much sense to select French as the language of arbitration when relevant correspondence is drafted in English, and the parties do not speak French.
Recommendation No. 10: Other Considerations
The parties have contractual freedom to agree on any (legally possible) feature of their arbitration clause. This may include or exclude:
- further considerations regarding the arbitrators to be appointed: sex, educational background, professional background (professor, engineer, attorney), nationality, etc.;
- a cap on arbitrator fees;[7]
- the way in which overall costs of arbitration are to be allocated in the final award, i.e., following the “costs follow the event” rule, or not.
[1] E. Gaillard, J. Savage, “Fouchard, Gaillard, Goldman on International Commercial Arbitration”, Kluwer Law International (1999), pp. 261-262.
[2] W. Craig, W. Park, J. Paulsson, International Chamber of Commerce Arbitration, 3rd ed., OUP (2000), para. 12.01.
[3] Law No. 30 of 1999 concerning Arbitration and Alternative Dispute Resolution, Article 28: “The language to be used in all arbitration proceedings is Indonesian, except that the parties may choose another language to be used, subject to consent of the arbitrator or arbitration tribunal.”
[4] J. Fry, S. Greenberg, F. Mazza, The Secretariat’s Guide to ICC Arbitration, 2012, para. 3-678.
[5] G. Born, International Commercial Arbitration, 3rd ed., Kluwer Law International (2020), pp. 2205-2282.
[6] G. Born, International Commercial Arbitration, 3rd ed., Kluwer Law International (2020), pp. 2205-2282.
[7] D. Henriques, Controlling the costs of arbitration: “fixed fees for arbitrator”, Silicon Valley Arbitration & Mediation Center, 24 July 2017.
