The “arbitration clause” or the “arbitration agreement” is the provision in a contract that allows the parties to have their dispute resolved by an arbitral tribunal instead of ordinary State courts.
An arbitration clause is binding and the parties cannot renounce unilaterally to the jurisdiction of the arbitral tribunal. In order to draft an effective arbitration agreement two basic rules should be followed: (i) keep it simple and (ii) use the standard or recommended arbitration clauses by arbitration institutions (see examples here).
The application of these two basic rules will avoid procedural incidents that can often occur due to invalid arbitration agreements or moot provisions that will require long debates and important resources in order to be interpreted and to understand the common intention of the parties. That said, some additional elements may be taken into account and the following tips may help to have a tailored arbitration clause.
Number of Arbitrators: One or Three?
When the amount in dispute is important it is usually preferable to have a three-arbitrator panel. If the amount in dispute is low, a single person panel will be more appropriate as this will reduce costs of arbitration related to the fees for arbitrators (see cost calculator). Hence, it could be preferable to specify that a single arbitration will be nominated if the amount in dispute is lower than a threshold amount, e.g. 2 million USD. To the contrary, if the amount of the claim is higher than the agreed threshold amount, the panel will be composed of three arbitrators.
Place of Arbitration
The parties should pay particular attention to the selection of the seat of the arbitration. This will affect the potential procedural incidents, provisional remedies, who can represent the parties in the arbitration, who can be nominated as arbitrators, the enforceability of the award, the annulment of the award, etc. Cities like Paris, Geneva, London, Stockholm and New York are often selected as place of arbitration for their arbitration-friendly laws.
Procedural Law Applicable to the Arbitration and the Arbitration Clause
Most standard arbitration clauses do not specify the procedural law that will govern the arbitration agreement. According to international practice and some case law this law may be the law of the seat of arbitration but this is often unclear and frequently parties are tempted to argue that different laws were implicitly elected by them. In order to avoid this kind of unnecessary debate, the parties may agree in advance that the arbitration agreement and the proceedings will be governed by the law of the seat of arbitration, which often is the law applicable to the contract that the parties have chosen in advance as well. It can be useful to mention that the mandatory rules of law of the place of the arbitration apply in any case to the arbitration proceedings.
Language of the Arbitration
It is also suitable that parties agree in advance on the language of arbitration. Here again, this will avoid unnecessary debates and additional points on which the arbitral tribunal will have to decide on. Usually the language of the contract is elected as the language of the arbitration.