Arbitration is an attractive dispute resolution process for contracting parties because it is created solely by their agreement and so can be tailored to suit their particular circumstances.
A well drafted arbitration agreement is the key to a fast and cost-effective arbitration.
Types of arbitration agreements
An agreement to refer future disputes to arbitration is usually included as a clause in the parties' contract itself. Alternatively, where there are a number of contracts between the parties (as is often the case in complex major projects and cross-border transactions) there can be a separate arbitration agreement that is incorporated by reference into all other contracts. Although arbitration agreements are included in and, as such, form a part of the contract, they are considered a separate agreement which survives termination of the contract or a declaration that the contract is null and void (this is known as the doctrine of separability).
Even if a dispute has arisen it is not too late for the parties to agree to arbitration in what is called a "submission agreement". This agreement needs to include all of the essentials of an arbitration agreement, but can also include a more detailed description of the scope of the dispute to be referred to arbitration.
The best way to make sure that any dispute between contracting parties is handled as efficiently as possible is to draft the arbitration agreement at the time the contract is entered into. This is because parties are much more likely to agree on a process for resolving disputes at the outset of a transaction than after a dispute has arisen.
Why is it important to draft an arbitration agreement properly?
A properly drafted arbitration agreement is not just a contractual nicety - it has some very important implications when a dispute arises, during the dispute process and at its conclusion.
The effect of a valid arbitration clause is that disputes covered by the arbitration clause will be resolved by the arbitration process designated in that agreement, as opposed to going to court or some other sort of dispute resolution process. Moreover, national courts (in countries that are party to the New York Convention) are obliged to grant a stay of court proceedings in the face of a valid arbitration agreement.
The validity of an arbitration agreement is also critical once the arbitrator's decision (award) has been rendered. If the unsuccessful party fails or refuses to abide by the award, then the successful party will have to seek to enforce the award through the courts of the place where the losing party has its assets. One of the grounds upon which a court (under the New York Convention[1] may refuse to enforce an award is if the arbitration agreement was invalid.
What are the key features of an enforceable arbitration agreement?
Reference to arbitration and scope: the arbitration agreement has to contain an agreement of the parties to submit present or future disputes to arbitration.
In doing so, parties need to think about the types of disputes that they want to submit to arbitration. If they wish to submit all types of disputes then they need to ensure that the wording of the clause is sufficiently broad. You should use general words such as "all claims, disputes and differences" and linking words like "arising out of" or "in connection with" and "in relation to". This will avoid costly and legalistic arguments down the track as to whether or not the parties intended to submit a certain dispute to arbitration.
On the other hand, if parties want to limit the types of disputes that are submitted to arbitration, they should expressly carve out those disputes from the scope of the arbitration clause.
Seat of the arbitration: The "seat" of the arbitration is the legal location of the arbitration (it is also often referred to as the "place"). The law of the seat governs the arbitral proceedings and regulates, for example, the powers of the tribunal, the supervisory powers of the courts over the arbitration and whether or not there is any recourse available against the award. For example, if Sydney, Australia was designated as the seat the International Arbitration Act 1974 (Cth) would apply.
Parties need to give some thought to their choice of seat to make sure that it is one that protects arbitration proceedings and provides the necessary framework for the proceedings.
Capacity and authority: obviously, the parties entering into the arbitration agreement must have legal capacity and authority to do so.
In writing: the arbitration agreement must be in writing - the modes of communication are continuing to expand to include, for example, electronic communications.
Additional elements for a good arbitration clause
Other areas which an arbitration agreement may address include:
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number of arbitrators (unless the chosen arbitration rules allow parties to designate the number after the commencement of the arbitration);
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language of the arbitration;
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choice of law for the arbitration clause;
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confidentiality of the arbitral process and award (if necessary);
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joinder of third parties;
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any limitations on the types of remedies that the arbitrator may award;
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currency of any award;
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provisions to fast-track the arbitration process;
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awarding of interest; and
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designated appointing authorities.
Although the above elements are not essential to make the clause enforceable they may avoid a lot of time and money being spent reaching agreement between the parties on these issues once a dispute arises.
Rules governing the arbitration process
Broadly speaking there are two types of arbitration processes that will be designated in an arbitration agreement:
- Institutional arbitration: This is where an arbitral institution administers the arbitration process and the arbitration follows the rules of that institution. Some well know institutions include the ICC, LCIA, and Australia's international arbitral institution, ACICA.
The institutional rules will cover all aspects of the arbitral process (e.g. process for commencing the arbitration (service of notice of arbitration), appointment and challenge of arbitrators, procedure for exchange of statements of claim and defence and other written statements, interim measures, hearings, and requirements for the award).
- Ad hoc arbitration: In this situation, there is no institution to administer the arbitration, and instead it is run by the parties and the arbitrators. It is important to be careful when undertaking an ad hoc arbitration to ensure that it meets all of the requirements for the final award to be enforceable. For this reason, many people use the UNCITRAL Arbitration rules.
Should I use a model arbitration clause or get a tailored clause?
All arbitral institutions offer model clauses, which parties may use instead of drafting their own arbitration clause. For example, the ACICA arbitration model clause says:
Any dispute, controversy or claim arising out of, relating to or in connection with this contract, including any question regarding its existence, validity or termination, shall be resolved by arbitration in accordance with the ACICA Arbitration Rules. The seat of arbitration shall be Sydney, Australia [or choose another city]. The language of the arbitration shall be English [or choose another language]. The number of arbitrators shall be one [or three, or delete this sentence and rely on Article 8 of the ACICA Arbitration Rules].
Although using a model arbitration clause can give parties peace of mind that they have covered off all of the essentials required for an enforceable clause, these generic clauses are not tailored to the parties' circumstances. The bespoke arbitration agreements that Clayton Utz prepares not only cover off all of the essential elements but are also tailored to best suit our clients' interests and encourage a fast and cost-effective arbitration process.
[1] The New York Convention (its full name is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards) is one of the most widely ratified treaties in the world (144 countries, including Australia). It makes the enforcement of arbitral awards much easier than the enforcement of foreign judgments as national courts are only able to refuse to enforce an award on very limited grounds.Back to article