Arbitration can be an incredibly effective method of commercial dispute resolution, especially in cases involving cross-border contracts/projects.
In this article, we provide a detailed analysis of Arbitration Agreements and what they need to include.
What is arbitration?
Arbitration is an Alternative Disputes Resolution (ADR) procedure used primarily to resolve commercial disputes, especially those with cross-border elements.
It's generally a quicker and cheaper option than litigation. However, one of the key advantages is that, as with a court order, an arbitration award is enforceable (although it can be challenged in court).
What are the pros and cons of Arbitration Agreements?
Advantages of arbitration
Arbitration has several advantages, including:
- It's generally (but not always) cheaper than litigation
- Parties can choose the jurisdiction to govern the arbitration, and parties can select an Arbitrator based on their skills and experience
Several international conventions, including the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, ensure that arbitration awards are recognised and enforced within contracting states.
Parties can agree on the arbitration procedure in advance to ensure it's suitable for the matter in dispute and can bring a swift conclusion.
Disadvantages of arbitration
On the other hand, arbitration also has several disadvantages, including:
- It requires good faith and agreement between the parties - an arbitrator’s powers are not as strong as to find someone in contempt of court
- The pre-arbitration procedures are often not as clear and direct as those under the Civil Procedure Rules
- There is limited scope to challenge the decision of an arbitrator
How can I ensure that I can send a dispute to arbitration?
Parties to a commercial contract can include an option to arbitrate a dispute by entering into an Arbitration Agreement which can be free-standing or form part of the wider commercial contract. The Arbitration Agreement confirms that certain disputes may be referred to arbitration and can be entered into after a dispute develops.
An Arbitration Agreement will set out:
- Will there be one Arbitrator or a panel of three?
- How the Arbitrator/s is selected
- Which jurisdiction will the proceedings be held in
- Will the arbitration be conducted using the rules of a recognised arbitral institution such as the International Chamber of Commerce (ICC), the Singapore International Arbitration Centre (SIAC), or the London Court of International Arbitration (LCIA))
Like all alternative dispute resolution methods, arbitration is voluntary. Therefore, there is little point in entering into an Arbitration Agreement if you have no plans to abide by the Arbitrator’s final decision.
What is the law governing Arbitration Agreements?
One of the essential Arbitration Agreement clauses is that which states which country’s laws will govern the arbitration. If this isn’t stated in the agreement, the UK Supreme Court has ruled that the law to which the Arbitration Agreement is most closely connected will apply. Usually, this is where the arbitration is to take place.
A common scenario is that the parties will determine the jurisdiction to cover the contract but must remember to do the same for the Arbitration Agreement. In such a case, the same legal jurisdiction that governs the contract will also apply to the Arbitration Agreement.
What are the consequences of a poorly drafted Arbitration Agreement?
Arbitration agreements are normally one of the last parts of a commercial contract to be drafted, and some solicitors can rush through the process. This can lead to expensive consequences such as:
- Litigation concerning the meaning and effect of the agreement
- If the Arbitration Agreement states that arbitration will take place in a country that’s not a party to the New York Convention, it can be tough to enforce any award
- Bind the parties to an expensive arbitration proceeding that is unnecessary given the scope and nature of the contract (an example of this is stating in the agreement that there must be three arbitrators when one would be perfectly adequate)
An experienced commercial law solicitor will first ask whether arbitration is the best dispute resolution method.
Mediation or adjudication may be better suited to resolving disputes in your market sector. They’ll then consider whether it's best to use model clauses produced by a particular institution, such as the International Chamber of Commerce (ICC) or the London Court of International Arbitration (LCIA).
Any model clause included in the Arbitration Agreement must be checked to ensure it's the latest version and compatible with the rest of the contract.
Does an Arbitration Agreement have to be signed?
A written Arbitration Agreement doesn’t need to be signed, nor is there a requirement for the agreement to be contained within a single document, meaning that an agreement to arbitrate can comprise an exchange of written communications such as emails.
However, the communications must be unambiguous and show that the parties intended to include an agreement to arbitrate.
Can an Arbitration Agreement be oral?
An Arbitration Agreement doesn't need to be made in writing.
The courts will use common law rules when determining the effect of an oral Arbitration Agreement unless the agreement references terms in writing. It's highly advisable to have a written Arbitration Agreement drafted by an experienced commercial law solicitor. Failure to do so runs the risk of going to court to determine what was agreed upon and/or making it difficult to enforce.
Should an Arbitration Agreement include a confidentiality clause?
If confidentiality is important to you, it's best practice to include a confidentiality clause in the Arbitration Agreement as there is doubt about the precise scope of the duty in English law to keep the arbitration private and confidential.
When are Arbitration Agreements not enforceable?
Arbitration clauses are often enforced according to contract law principles. However, some jurisdictions hold them unenforceable if there has been any fraud, overreaching, or the absence of mutuality.
Get legal assistance from LawBite
Entering into an Arbitration Agreement can significantly benefit your business, especially if you launch a cross-border initiative.
Our dispute resolution solicitors can provide you with the advice you need to ensure any Arbitration Agreement you draft and/or sign protects your best interests. To find out how we can support your company, book a free 15 minute consultation or call us on 020 3808 8314.
