Henna's article was published in Law360, 21 February 2023, and can be found here.
Carefully considering Arbitration Clauses
Recent decisions handed down by UK judges have shone light on the potential pitfalls of attempting to refer cases to arbitration, and should act as cautionary tales to any party seeking such measures. As shown in several high-profile cases, which are discussed in more detail below, failure to include arbitration clauses in agreements between entities, or failure to properly word and strengthen such clauses, can give rise to manifold problems when either side attempts to force the other into arbitration.
In order to have the option of going to arbitration, parties to a commercial or other agreement must agree that a dispute can be taken to arbitration.
However, most commercial entities, when negotiating agreements, do not consider any issues which may arise at a later date, but rather naively assume that any agreement or contract will complete without any complications arising at the time or thereafter.
When a dispute then does arise, the methods of resolution can become very complicated, time consuming and expensive, if this has not been considered at the outset.
For this reason, it is always recommended that parties consider the possibility of adverse issues arising prior to the execution of any agreement or contract and, specifically, consider arbitration as a method of dispute resolution.
Unlike with court litigation, all parties must agree to arbitration – it cannot be forced upon anyone. This choice is usually made by way of including an arbitration clause in a commercial agreement. It is important that the arbitration clause in any agreement is properly drafted.
An arbitration clause defective in its construction can be held invalid and arbitration will no longer be an option available to the parties or an arbitral award will not be enforceable.
So, why choose arbitration?
- Neutrality: For parties in separate jurisdictions, they can select a neutral forum in which a dispute can be heard. For example, many parties choose London as their arbitral seat which is generally regarded as the leading seat for arbitration, along with Singapore.
- Confidentiality: The parties to arbitration are subject to duties of confidentiality and arbitration hearings are usually held in private. In contrast to this, court hearings in England are usually open to the public and no parties can obtain copies of judgments and statements of case.
- Finality: There is certainty for the parties as an arbitral award is binding and the options for challenging an award are limited and difficult. By comparison, a court judgment can frequently be subject to appeal and an appeal of a judgment is more likely to be allowed.
- Flexibility: Unlike with litigation, parties are free to tailor procedures for arbitration to their specific dispute or make changes of procedure where required. The perfect example of this was during the pandemic when rules and guidance were quickly introduced to allow filing of documents online where possible to keep matters moving. In comparison, most courts were forced to suspend most cases due to the lack of flexibility in procedure.
What are the drawbacks to arbitration?
- Cost: Arbitration can be more expensive than litigation. Parties must, in a short space of time, pay arbitrator fees, venue fees, travel expenses, costs of any experts and witnesses as well as the administrative costs for the arbitration. However, costs can be managed if parties agree clear and specific procedural steps and a firm timetable at the outset of the arbitration.
- Delays: While it may appear that the arbitration process is quicker than litigation, the lack of sanctions imposed on parties who do not comply with procedural steps means that these delays can sometimes become extended. Some tribunals may be reluctant to impose sanctions on parties as this can lead to challenges to an award on the grounds that a party was not permitted to present its case properly.
- Limited outcomes: With arbitration, the remedies available to parties are somewhat limited. Only those who are a party to the arbitration clause are bound by the award. In comparison for example, through litigation, if a party is granted a freezing injunction against its opponent, that injunction can be served upon a third party and that third party will be bound by it.
Part I of the Arbitration Act 1996 contains the requirements of English arbitration law.
Section 5 of the Act states that:
The provisions of this Part apply only where the arbitration agreement is in writing, and any other agreement between the parties as to any matter is effective for the purposes of this Part only if in writing.
This means that not only should the arbitration agreement itself be in writing, but any other terms relating to the arbitration must be set out in writing. For example, these can contain details of the agreed arbitral seat, the chosen jurisdiction, the formation of the arbitration panel, how the arbitrator(s) will be selected, etc.
It is therefore extremely important that the arbitration clause or agreement is drafted carefully and is compliant with the provision of the Arbitration Act 1996.
The effect of this is that there should be no abuse of process by one party issuing a court claim at the same time as an arbitration is ongoing for the same dispute. Section 9 (1) of the Act gives a party the ability to apply for a stay of proceedings in circumstances where a concurrent court claim is initiated.
It is also important for the agreement to be in some form of writing as the parties are deciding to refer a matter to arbitration rather than availing themselves of the court process.
However, if the parties are contemplating enforcing the arbitral award outside of the English jurisdiction, then they must be aware that the definition of “in writing” differs from jurisdiction to jurisdiction.
The UNCITRAL Model Law was introduced to assist various UN States in amending their laws on the arbitration process to bring cohesion between the states in international commercial arbitration. The Model Law covers all aspects of the arbitration process including recognition and enforcement of arbitral awards.
The Model Law reflects worldwide consensus on key aspects of international arbitration practice accepted by member states and lessening the uncertainty of enforcement of arbitral awards worldwide. The Act contains many provisions based on the Model Law, but English Law has not adopted the entirety of the Model Law.
It is therefore very important that parties consider the enforcement of an award when drafting their arbitration agreement so that any award remains enforceable in the relevant jurisdiction.
The definition within Section 5 of the Act is very wide and any agreement in writing, whether signed or not, complies with the Act. Section 5(b) and (c) makes the definition even wider.
This can include being bound by an arbitration agreement that is contained within standard terms and conditions or recording the parties’ agreement to arbitrate within minutes of a meeting.
"Arbitration agreement" is defined in Section 6 of the Act as "an agreement to submit to arbitration present or future disputes". Following the decision in Fiona Trust v. Privalov and others, the English courts will try to interpret clauses in favour of arbitration where the parties can demonstrate that this was what the parties had intended.
In Buheiry v. VistaJet Ltd., Mr Buheiry challenged an arbitral award on the basis that an assignment of an agreement by VistaJet Ltd. was invalid thus invalidating the arbitration agreement contained within it.
Judge Richard Jacobs found that even if the assignment of the agreement by VistaJet Limited had been invalid, it did not raise an issue as to the substantive jurisdiction of the arbitral tribunal. The principle of separability applies to arbitration agreements that form part of a larger contract.
The arbitration agreement contained in such a contract is an independent and separate contract to that which it is contained within. Therefore, even if the larger contract becomes invalid, in most circumstances the arbitration agreement will survive. The intention of the parties was to refer a dispute to arbitration, that intention remained outside of the validity of any assignment of the agreement.
In DHL Project and Chartering Ltd v. Gemini Ocean Shipping Co. Ltd., the doctrine of separability was also considered. Justice Stephen Males observed that while the separability principle is an important concept, it is important to distinguish between situations where no main contract has been concluded whether it be for want of validity or an issue of construction.
In such a situation, it cannot properly be concluded that the intentions of the party were to enter into an arbitration agreement.
In Aiteo Easter E&P Company Ltd. v. Shell Western Supply and Trading Ltd., the judge found that a dispute resolution provision which provides that one or both parties “may” submit or refer a dispute to arbitration is not itself a fully formed arbitration agreement.
Such a clause simply gives a party the option of referring a dispute to arbitration. The arbitration agreement only becomes into being when the option to arbitrate is exercised.
When drafting an arbitration clause in an agreement or contract, the intentions of the parties must be clear and the construction of the clause should leave no doubt for a judge in any jurisdiction that the parties had entered into an agreement to refer a dispute to arbitration.
Use of “must” or “shall” within an arbitration clause are much preferred to “may”. It would be very unfortunate if parties referred a dispute to arbitration and went through all the steps of an arbitration but were then unable to enforce the award due to defective construction of the arbitration clause.
There is a tendency for parties to include a pre-condition of negotiation before a dispute can be referred to arbitration. Such clauses can cause confusion and it is difficult to determine when the negotiation phase is complete and the ability to go to arbitration is possible.
Therefore, it is sensible to consider this issue when drafting an arbitration agreement or dispute resolution clause. This does not mean that parties cannot attempt to negotiate, but a pre-condition of negotiation in the arbitration clause should be a very clear addition which leaves little room for error in interpretation for any party to the agreement.
This issue was considered in Republic of Sierra Leone v. SL Mining Ltd. Here, the dispute was related to a mining licence which contained a muti-tiered dispute resolution clause. Sir Michael Burton found that non-compliance with a multi-tier dispute resolution clause is an issue of admissibility rather than one of jurisdiction.
The proper authority to determine whether a dispute has properly been referred to arbitration in these circumstances is the tribunal rather than the courts and non-compliance with a multi-tier dispute resolution clause does not give rise to a challenge of jurisdiction of the tribunal under Section 67 of the Act.
A pre-condition to arbitration should therefore not be bar to arbitration but should be seen as a period of reflection and negotiation for the parties before initiating arbitration proceedings.
The simple position is that arbitration as a remedy is only available if there is an agreement in writing to refer a dispute to arbitration. While the definition of “in writing” under the Arbitration Act remains quite wide, and English judges are minded to find in favor of arbitration, to ensure that an award is enforceable worldwide, it would be sensible to have a clear arbitration clause in any agreement which leaves no doubt as to the intentions of the parties.
The failure to include an arbitration clause will mean that the parties will have to either negotiate a settlement or refer the matter to the Courts, which can become very expensive.
Today, arbitration clauses are part of the standard wording in the model contracts used in many commercial areas such as construction, energy, international trade and finance.
However, it is evidently critical for parties to carefully consider the drafting of any arbitration clause or separate arbitration agreement to ensure that it complies with the requirements of not only the Arbitration Act 1996 but also any relevant requirements related to enforcement outside of the jurisdiction.
 Fiona Trust v. Privalov and others  EWCA Civ 20.
 Buheiry v. VistaJet Ltd.  EWHC 2998 (Comm).
 DHL Project and Chartering Ltd v. Gemini Ocean Shipping Co. Ltd.  EWHC 181 (Comm).
 Aiteo Easter E&P Company Limited v. Shell Western Supply and Trading Ltd.  EWHC 2912 (Comm).
 Republic of Sierra Leone v. SL Mining Ltd  EWHC 286 (Comm).