Azadeh Meskarian on The Top 4 Arbitration Clause Essentials
01 Aug 2017
Arbitration is an extremely popular method of commercial dispute resolution. Many international contracts will include an arbitration clause (referred to as an arbitration agreement) by which the parties agree to resolve disputes privately by an arbitrator, who is often an experienced commercial lawyer or a retired judge, rather than through the public court process.
The arbitration agreement is legally treated as a separate agreement from the main contract. It is effectively a contract within a contract, and it is important to get it right. These are some of the many factors parties should consider:
1. Governing law and the venue
The law governing an arbitration agreement is important as it will determine any issues about the validity or scope of the arbitration agreement. This may or may not be the same law as that chosen by the parties to govern the contract generally.
Some arbitration institutions have standard arbitration clauses which do not specify a governing law, whilst other institutions prompt the parties to specify a choice of law. It is usually undesirable to subject both the arbitration agreement and the contract of which it forms part to the same law. This will help to simplify the arbitration process and any potential hurdles along the way.
2. Seat of Arbitration
The seat of the arbitration is the legal jurisdiction in which the arbitration process is rooted. The place chosen as the seat of the arbitration is often where the arbitration will take place, although this is not mandatory, the Parties may for convenience agree that hearings occur elsewhere.
The seat of arbitration impacts the law of the arbitration process and potential subsequent challenges to the resulting arbitration award. There may also be certain mandatory rules of law that apply at the place of the seat, irrespective of the choices the parties may have made in their agreement.
For the ease of enforcement of any award, parties should ensure the chosen seat is in a country that is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958(“New York Convention”) (more on this in paragraph 4 below). Where an award is not satisfied voluntarily, the successful party must enforce it in court to recover what it is owed, and enforceability should be a primary concern to all parties.
3. Institutional vs ad hoc arbitration
Parties are free to agree whether any arbitration will be administered by an arbitration institution, such as the London Court of International Arbitration, subject to its own rules, or proceed as an ad hocarbitration.
In an institutional arbitration, the appointed institution will provide guidance on the interpretation and administration of the arbitration rules, supervise the overall process, assist in the formation of an arbitral tribunal, and potentially reduce the time and cost of the overall process. Alternatively, in ad hoc arbitration, the parties may create their own rules and procedures, or rely on the local arbitration legislation at the seat of the arbitration. Ad hoc arbitration may prove less costly and provide significant flexibility to the parties.
Different arbitration institutions have different rules, many of which possess similar features following extensive amendments in the last few years (for example, emergency arbitrator provisions, and rules on multi-party arbitration). However, there continue to be significant differences which merit careful consideration by an experienced professional.
4. Enforcement of Arbitration Awards
One of the main benefits of arbitration is the greater ease of enforcing an award abroad, when compared with the more cumbersome process of attempting to enforce a court judgment in a foreign jurisdiction.
This is in large part due to the New York Convention, which provides an international legislative framework for the recognition and enforcement of international (i.e.; non-domestic) arbitral awards by national courts in signatory member states. There are currently 157 signatory countries to the New York Convention, and a national court should with minimal formality recognise and enforce an international arbitration award where the seat of the arbitration and the jurisdiction in which enforcement is sought are both signatories to the New York Convention.
There are some limited circumstances in which a court may refuse to recognise or enforce an award under the New York Convention. These include cases where the arbitration agreement was invalid, or enforcing the award would violate public policy. The public policy exception is unfortunately subject to different standards of interpretation in different countries, a matter which should be given due consideration when drafting arbitration agreements and selecting a seat.
While arbitration remains one of the most desirable forms of alternative dispute resolution, it is important that parties to seek comprehensive legal advice on the suitability and potential implications of a proposed arbitration agreement. If you require any further information on this topic please do not hesitate to contact Azadeh Meskarian on 0207 312 1000, or alternatively by email:email@example.com.