ARBITRATION LAW UPDATE. PRINCIPLES BEHIND DRAFTING EFFECTIVE ARBITRATION CLAUSES
- Defining the do’s and don’ts of drafting arbitration clauses
- Discussing two main principles behind arbitration clauses and submission to arbitration
- Exploring types and categories of clauses
- Understanding the essential clauses in arbitration submission/agreements
Arbitration may be preferred as a dispute resolution method; it could be decided when negotiating contracts, treaties or separate arbitration agreements. However, if both parties consent, this may be included after a dispute has risen. This presentation however, focuses on the pre-contracted arbitration, included in contracts.
As a rule of thumb, the drafting and adaptation of these clauses should not be ambiguous. Unclear wording in the clause will cause uncertainty and delay and may hinder or even compromise the dispute resolution process. This paper is part of a series of arbitration materials Breakthrough Attorneys’ Litigation and Arbitration Team has in place and was also in 2018, presented as a CLE Topic for the Tanganyika Law Society, the Bar Association for Tanzania Mainland.
Let us talk about the main principles. The key principles in arbitration itself in general are;-
(a) The Kompetenz-Kompetenz principle –
This presupposes the ability of the arbitral tribunal to determine its own competence, i.e. jurisdiction. The freedom of the arbitration process from Court interference can start to be seen here.(See further in Clause 7.7)
(b) The Severability principle –
The fact that the arbitration clause is in itself an independent agreement and it is severable from the rest. In essence, it may be within or outside the contract and whatever happens to the contract it will survive unless it is personally in question.
Having seen the two principles behind arbitration, it is now imperative to explore the functions and objectives of Arbitration clauses in our perspective.
2.0. Essential functions of Arbitration Clauses
These are the objectives which any arbitration clause, or willingness to submit to arbitration, is trying to achieve. In essence, when one is drafting an arbitration clause, he or she ought to ensure that the following purposes are fully exuded by the frame of an arbitration clause;-
i. To produce mandatory consequences to parties in dispute.
ii. To oust state courts intervention
iii. To empower arbitrators to resolve disputes
iiii. To adopt or devise a procedure of resolving disputes.
3.0. Categories of Clauses
i. Basic clauses;
These are those clauses in which arbitration may be conducted in courts, institutions and situs. These are the simple everyday clauses and we can say they are straightforward.
ii. General clauses;
These are those which attempt to upgrade the arbitral process and tend to cover other general aspects of the arbitration process. Such aspects include the interest on the claim, procedural conditions; qualification of the arbitrators, the fees of the attorneys, interim measures and currency of the award etc.
iii. Complex clauses;
These are those which may include both categories above but also go further into specifics of distinctive procedures. Some Parties would want the arbitral process to be more to the point and inclusive and/or to leave no stones unturned. Example of clauses which may be fall under this category include those which specify issues of consolidation, confidentiality, split clauses, expert determination, summary disposition, multiparty arbitration and submission of draft award etc.
4.0. The Don’ts of drafting
4.1. Avoid offering mandatory rules of the applicable situs, procedural or substantive law.
(b) The clause which stated award shall be subject to the limitation of the situs law (situs in the Clause was Middle East) and hence the Award excluded interest since interest was inapplicable in the Middle East.
(a) French Case whereas the clause limited award to the same level of awards as per French Law and the arbitrator awarded broader award. The Award was overturned afterwards subject to French law’s maximum award in ordinary cases.
4.2. Avoid alterations of arbitral rules of the administering institution i.e. ICC. Once you prefer adopting certain institutional rules of arbitration, take them as a whole. Adopting in parts and altering the rest may be detrimental and may lead to absurdity.
4.3. Avoid pathological expressions and terms i.e. extensions to deadlines, the word “may” indicates that the arbitrator was not mandatory and the word “us” indicates that the parties are not mandatory forced to pledge arbitration
5.0. Essential Clauses
i. Explicit statement that arbitration is adopted. i.e. the ICC
ii. It has to be final and binding.
iii. The scope of arbitration can either be in a narrow form (all disputes arising from an agreement) versus a wider form (all disputes arising in connection with the contract).
iv. It can be Ad hoc or institution arbitration. Please note that although the latter may be costly but the administrative work is effective, there’s a review of award, quality control and the interference of the courts is minimal.
v. The number of arbitrators should be fixed. Ensure odd number selection so as to not have a tied decision when the award is to be reached. Costs are a thing to consider when listing the number of arbitrator.
One of our client, an individual person, leased a property to a major international company and the arbitration clause stipulated that in case of a dispute, there will be 2 arbitrators and an umpire. This proved to be too costly when a dispute arose, and the client readily labored through the arbitration proceedings, as the cost for the arbitrators, apart from that of the venue and legal representation fees, were roughly two-thirds of his entire claim against the company.
vi. Show that the institution (if institutional rules are preferred) may appoint an arbitrator if a party fails to appoint one.
vii. There must be a place of arbitration. (Remember this is not necessarily the same as the law of the arbitration, to wit, lex arbitri). Always choose wisely as it is the one which determines the extent of such places interference with the arbitration process (which we do not want) as well as it determines the post arbitration procedures which are very important. Also remember that the costs of running the proceedings and attending the same are related with a place.
Breakthrough Attorneys had a client with an arbitration clause in a simple lease agreement. The place of arbitration was Johannesburg, South Africa. When a dispute arose it was tough to trigger the clause given the costs involved, even before our legal representation fees. The client had to waive claims.
viii. The law of the arbitration. (As per the above, it may not be of the place of arbitration. i.e. Lexi Loci Arbitri). Ensure that you are aware of the law you accept to put as the law to guide the arbitration.
Breakthrough Attorneys recently advised a client who had an arbitration clause picking Tanzania as the place of arbitration and the law of Tanzania as lex arbitri. Nonetheless there was one addendum dealing with equipment and software, which stipulated that in case of disputes for software and equipment, the law was to be Finland’s law. This was problematic in several ways; One, it did not align with the place and law of arbitration in the main contract, and two, because the client had no knowledge of Finnish law and neither expertise nor intention to submit to that law. We advised our Client, who successfully did, to negotiate alignment of that clause with the main contract
ix. The language of arbitration must be uniform in order to avoid ambiguity in application.
6.0. Other Important Considerations
6.1. Qualification of arbitrators
This is in reference to the knowledge of language(s), special skills and industry to the arbitrators. Depending on sensitivity and specialty of the subject matter of the agreement, it may be imperative that the arbitration clause specify skills and qualifications of the to-be-appointed arbitrator(s). Issues of impartiality also arises in the aspect of testing the qualification of the arbitrator(s).
6.2. Interim measures
As it is essential in some occasions to preserve the status/integrity of the subject matter, interim orders such as injunctive orders may be necessary. A drafter, depending on the nature of the Contract may insert clauses on Interim Reliefs.
Some (refer to split clauses on complex clauses discussion above) would give such power to Courts, while the arbitration on the principal dispute remains before the arbitral tribunal. Some, would empower the Arbitral tribunal itself to make interim orders as per parties’ applications.
6.3. Waiver of appeal/exclusion agreement
Finalization and the binding nature of awards. This is with regards to those rules or institutions which allow post award appeals or remedial proceedings. A drafter ought to know the rules of such tribunal and see whether the parties would wish such a process beforehand before submitting to a process which the award may not be final. See our previous article.
6.5. Governing Law.
This is summarized in five aspects;
a) Substantive law and conflict rules
b) Procedural law.
c) Lex arbitration. This is used in the absence of procedural law. Whereas, the arbitration agreement may not be subject of the same law as that of the contract. Parties often assume that the law of contract applies hence it rarely mentions in the clauses. Parties at times choose law which is neither situs law nor governing law of the contract.
d) Denationalized law. Whereby the arbitrators may sideline the law of a country and choose a denationalized law. This includes; merchant law, international law and general principles of law.
e) Placement of the governing law provision. Placing the governing law provision inside in order the arbitration may be construed as lex arbitration or procedural law and not as substantive law.
f) Drafting consideration. It can be broad mode or a narrow mode. (Refer 5(iii) above)
6.6. Equitable principles (arbitrators’ leeway).
The Arbitration agreement can also specify the applicability and/or authorization of reference to equitable principles of dispute resolution. In arbitration spheres, there are two principles; amiable compositeur (cannot apply the law strictly but still apply the rules of law) and ex aequo et bono (need not to apply legal principles)
NOTE: in ex aequo et bono, the law still be applied on mitigation but on amiable compositeur, the authority by parties to act their agent to settle the dispute arbitration compromise the parties dispute.
6.7. Waiver of sovereign immunity
6.8. Expert Determination.
For those Agreements based on expertise parties may decide that disputes are to be solved using expert determination. In essence, arbitration is done through an appointment of an expert who determines the disputes and his determination as an expert, becomes a decision.
NOTE; an expert determination is not enforceable as an award, as an arbitral award but as a contract. To enforce this, on has to sue on it (mostly by courts).
6.9. Punitive and consequential damage exclusion or inclusion in awards.
6.10. Cost and Attorney’s Fee.
The key issues which drafters are to determine their inclusion are whether interest is to be awarded; what date of calculation should start; and the rate of interest.
NOTE; parties should expressly authorize an award to bear interest if they wish.
6.12. Currency of the award
7.0. Unusual Clauses but applicable
7.1. Confidentiality binding between parties and arbitrators.
7.2. Arbitration Vis-à-vis litigation; that will include production of documents. Deposition and interrogatories. i.e. IBA- supplementary rules governing of presentation and reception of evidence in international commercial arbitration.
7.3. Multiparty arbitration. (Refer Siemens AG Case), where the claimant had claims against 2 respondents. The arbitration clause provides for three in accordance to the ICC rules. The ICC, AAA and ICLIA have all made rules that all the arbitrators will be appointed by the institutes in case of multiparty arbitration.
7.4. Consolidation of arbitral proceedings.
7.5. Split clauses; in reference to disputes which feature both arbitration and court litigation. Landmark example is in reference to the case of Scott vs Avery  where the clauses stated that “those litigated issues are to wait until an award is reached in those arbitration issues”.
7.6. Summary disposition (written Procedure). This is where the dispute is determined through the arbitrator(s) summarily reviewing the documentation and entering an award. However, the right to be orally heard is retained if a party implies so.
7.7. Arbitrability. Includes competence. Famously referred as “kompetenz-kompetenz principle (Refer to Para 1.0 (a) above). This connotes the ability for arbitrators to decide on their own jurisdiction. That is, Jurisdiction concerning jurisdiction.
There are several modes of different countries in case of testing the arbitrability of the dispute under a tribunal;
a) French mode; arbitrators can look at their jurisdiction without waiting for the court to do so.
b) English mode; arbitrators may look at their jurisdiction without the intervention of the courts, but after the determination, Courts may review it.
c) Germany mode; the arbitrators can determine their jurisdiction in a binding manner.
Note; Parties must specify which mode is in play in order to allow the arbitrators to have their jurisdiction.
7.8. Consent to Appeal. (Refer to institutional arbitration rather than ad hoc, even though the latter may apply too) In reference to the process in Tanzania this is a party mandated procedure. If an appeal is not preferred or even if preferred, still validation of an award from an appellate arbitral procedure needs to done through reference to the High Court, for enforcement or review purposes, the latter if one is aggrieved.
7.9. Adaptation of contracts and gap filling. Some clauses would allow Arbitrators to “fill gaps” in the contract and/or adapt to “ordinary usage/interpretation” in places where the contract would be vague or uncertain.
7.10. Draft of proposed award.
In this aspect, parties may draft the arbitration clause in the sense that it obligates the Arbitrator to issue the draft of the award before finally sharing. Such an inclusion can be structured as follows:-
a) It should state whether the proposed award draft is to be served on the parties or parties to collect them.
b) Give the time to review and correct error of facts or law may be stated.
c) State the time for the arbitrator to deliver a signed award. (For Tanzania, if you have a basic clause, be sure to read and abide with the timeline in the Arbitration Act, Cap 15 especially The First Schedule paragraph 3, 4, 5, and 6).
When drafting arbitration clauses one should be keen to assess the laws of the seat of arbitration, extent of interference of courts in the seat, costs involved and one’s ability to cater for them, the governing law of the contract and possible conflicts between the lex arbitration (contractual law) and that of the place of the arbitration etc.
In a further light to the issue of costs, one should always consider the his abilities to arbitrate in a particular, place or manner so as not to succumb to costly tribunals and or processes, or on the other side, succumb to slower processes clogged with complicated procedures.
The question of an arbitration clause in contract is a wholesome subject and needs a 360 approach to all the factors of the contract, the parties, the industry and the legal and institutional frameworks, looking at both the subject matter, procedure, finance, speed etc.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.