Monday, March 5, 2018

Drafting Arbitration Clauses

It is common practice that commercial agreements contain clauses that provide for arbitration as the mechanism to resolve disputes.

There are a number of reasons why parties choose arbitration rather than court as the forum to resolve their disputes. One is that when parties from different countries enter into a contract, if a dispute arises they may not feel comfortable going to the court in the other party’s country. As an alternative, parties may choose arbitration as a neutral forum for resolving disputes. Another rationale for opting for arbitration rather than courts is that arbitration is a private dispute forum compared to courts which are public forums.

The most advantageous reason to include an arbitration clause in a contract is that arbitration awards are enforceable through the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). The Sultanate of Oman is a signatory to the New York Convention, which was ratified into Omani law by virtue of Sultani Decree 36/1998. Under the New York Convention an award rendered in any of the 157 countries that are a party to the New York Convention should be legally enforceable in all other countries that are a party to the New York Convention. There is no comparable convention for the enforcement of court judgments.

Unclear drafting 
One common problem that parties face when including arbitration clauses in contracts is that the clause may be drafted poorly which can lead to a considerable amount of time spent by lawyers fighting about the clause. In the worst case scenario, errors in arbitration clauses can lead to the clauses being unenforceable.

Several common problems appear in poorly drafted arbitration clauses; one is that an arbitration clause names an arbitration center or arbitral rules that do not exist. Another problem that frequently occurs is that part of the clause is omitted altogether, for example the name of the arbitration rules is missing or where the arbitration will take place is missing.

These problems can be easily avoided by carefully drafting clear arbitration clauses.

Key considerations when drafting your clause 
There are a number of key considerations that should be kept in mind when drafting every arbitration clause.

1. Whether the arbitration will be administered or ad hoc This is the first and most fundamental consideration parties should take into account when drafting their clauses. If parties opt for an administered arbitration, this means that an arbitration center, for example the International Chamber of Commerce (“ICC”), will oversee the arbitral procedure and facilitate the proceedings. If parties choose ad hoc arbitration, this means that there will be no arbitration center in place to facilitate the proceedings and it will be up to the parties to decide on the dispute resolution procedures. Ad hoc arbitration will often be less expensive than administered arbitration but will lack an arbitration center guiding the proceedings.

2. Which arbitration rules will be used? 
There are various arbitration centers that administer arbitrations in the region and each has its own set of rules. When choosing a set of rules, only the arbitration center that has published those rules should administer arbitrations under those rules.***

Most regional centers typically administer arbitrations in the city where they are based; in comparison, larger arbitration centers such as the ICC and the London Court of International Arbitration administer arbitrations in cities throughout the world.

3. Where will the arbitration take place? Parties should choose a place that is mutually convenient for the parties involved and is located in a country that is a signatory to the New York Convention to ensure enforceability of the award.

4. How will the tribunal be selected? 
Tribunals are comprised of one or three arbitrators. Parties often include in their arbitration clause the number of arbitrators and how they will be selected. If parties fail to include this in their clauses, the default procedures included in the rules that the parties have selected will provide a default number of arbitrators and a procedure for their selection. When a tribunal is comprised of one arbitrator, the usual practice is that parties will have a certain number of days to agree on the arbitrator; if they fail to do so, an arbitration center will make the appointment for the parties. When a tribunal is comprised of three arbitrators, the most common procedure it that each party will appoint an arbitrator and the two party-appointed arbitrators will appoint the third.

5. Language of the arbitration
In particular in the Middle East, parties should give due consideration to the language of the arbitration and ensure that they include the language in each arbitration clause in order to avoid having the arbitration in a language with which they are not comfortable. For example, the default language under the rules of the Abu Dhabi Commercial Conciliation and Arbitration Center (“ADCCAC”) is Arabic unless the parties agree otherwise.

Takeaway points to consider when drafting your arbitration clauses 
• Parties should carefully draft clauses to ensure that they do not contain any errors.
• Parties should ensure that they have taken into account the considerations listed above when drafting their arbitration clauses.
• Parties may want to utilise Model Clauses published by arbitration centers.

***For example, Article 1(2) of the ICC Rules states that the ICC "is the only body authorized to administer arbitrations under the Rules."

Click here to read Drafting Arbitration Clauses - Part II: Ad Hoc or Administered Arbitration
Click here to read Drafting Arbitration Clauses - Part III