Striking Before Midnight: The Arbitration Clause And Its Contents

This short paper seeks to highlight both the essential and desirable components of an arbitration clause and, implicitly, to encourage commercial contracting parties to resist the temptation of simply drafting a so-called ‘midnight clause’, leaving discussion of dispute resolution to the very end of meaningful negotiation. It also goes on to examine the form of a submission agreement, whilst acknowledging that, where a dispute has actually arisen, there may well be a level of hostility between the parties needing to be overcome.

The wording of an arbitration clause must be such as to fulfil the intentions of the parties. Given that parties will generally wish for any dispute between them to be resolved by arbitration, the agreement should be drafted to ensure that, in the event of a dispute, arbitration is not only a right for each of the parties, but also an obligation. The wording should also ensure it covers all disputes and should, therefore, avoid setting out categories of disputes.

As to how a dispute is defined or described, words such as ‘differences’ and ‘disputes’ have, reassuringly, each been held to carry with them a wide meaning and jurisdiction. As to the relationship between the dispute and contract, there was a time when much legal discussion took place as to the use of words such as ‘under the contract’, ‘arising out of the contract’, ‘in connection with the contract’ and ‘in relation to/in respect of the contract’. However, there is now good authority (Fiona Trust and Holding Corporation v. The Yuri Privalov [2007] EWCA Civ 20) that a broad interpretation of such words should be given.

It is generally good practice to select a standard form of clause, which will usually emulate from an arbitral institution or from an international authority, such as UNCITRAL. It is, however, generally wise to supplement the words of a model clause by including provisions as to:

  • the place of seat of arbitration;
  • the law governing the substantive dispute;
  • the law governing the arbitration agreement;
  • the law governing the arbitral proceedings (the lex arbitri) if, rarely, it is not the law of the seat.

A failure to address these issues, in the event of disagreement by the parties, will fall to be resolved by the arbitral institution (if an institution is being used), by the arbitral tribunal or by a court.

Experience shows that it is often wise practice to agree as much as possible in advance of a dispute arising and, for the sake of later certainty, to seek to address all of the following within the clause:

  • A clear wording that states that any and all disputes between the parties shall be resolved by arbitration.
  • The number or arbitrators (usually a panel of 3, or a sole arbitrator).
  • Provisions as to the establishment of the arbitral tribunal.
  • Whether the arbitration will be ad hoc or institutional.
  • The procedure to be adopted if a vacancy in the tribunal needs to be filled during the course of the arbitration.
  • The seat of the arbitration.
  • The governing law of the arbitration agreement (failure to include this may, on occasion, give rise to contention and difficulty. It should therefore generally be addressed within the agreement.)
  • Default clauses, to address the failure or refusal of a party to take part in arbitration and to ensure that such a course does not frustrate the arbitration;
  • The language of the arbitration.
  • The provision of so called multi-tier dispute resolution, if appropriate in a given instance. In other words, a provision addressing in clear terms a requirement or an option to engage in a non-binding ADR (alternative dispute resolution) process, such as mediation.

Where ad hoc arbitration is chosen, or where there is a wish by the parties to deviate from some aspects of the institutional rules that they have adopted, there will be a need to cover additional procedural issues within the agreement. In addition, the parties may, if they wish, give particular powers to the arbitral tribunal that would not usually be available under the law governing the arbitration or under the relevant institutional rules. Those additional powers might, for instance, include the power to order a party to provide security in respect of the amount that in dispute.

For practical purposes, it should also be noted that, even where parties have agreed in an arbitration clause to arbitration under particular institutional rules, those same parties may agree between themselves to a different approach when a dispute actually arises. Thus, they could, if they wish, move from institutional to ad hoc arbitration or to arbitration under different rules. In such a case, a new agreement would, of course, have to be made and, where a dispute has arisen, that will be by way of a submission agreement.

Submission Agreements

Where a submission agreement is to be used, there are practical considerations to be addressed that are quite distinct from those that arise when an arbitration agreement is being drawn up. It must be remembered that, when a dispute has arisen, there will usually be some animosity or hostility between the parties, their respective interests are likely to conflict and all those involved will know the nature of the dispute that has arisen.

Thus, although a submission agreement will contain most of the features of an arbitration agreement, it will be particularly important to include within it a definition or description of the dispute or disputes that actually fall to be arbitrated. It will also usually be sensible to include more detailed procedural arrangements for the arbitration itself. These are likely to include:

  • A proposed timetable.
  • Arrangements for production of documents.
  • Exchange of submissions and evidence.
  • Other features that have, by that stage, become apparent, such as the need for a hearing. (It will be a matter of judgment, in any given case, whether such issues should be addressed within the submission agreement or in a separate document, prepared in conjunction with the arbitral tribunal itself once that has been convened.)