The words of Hon'ble Ms
Parties must know "how to draft an arbitration clause" and more importantly know "how not to draft an arbitration clause" as once a dispute arises between parties, the clause significantly impacts the dispute resolution process.
An arbitration agreement should always be meticulously drafted while anticipating different factors of the transaction. It is imperative to include which disputes can be referred to arbitration and the clause also needs to mention the seat of arbitration, venue of arbitration, governing law, a panel of arbitrators, etc. in case of an ad hoc arbitration.
The
However, the contrary is witnessed as parties are often found taking advantage of defective or inartistic arbitration clauses to resist arbitration and to delay the dispute resolution mechanism. Many commercial contracts showcase faulty dispute resolution clauses which lead to the arbitration clause itself being the bone of contention. Details of drafting are not focused on by parties leading to losses of money and time.
Some common examples of defective arbitration clauses are as follows:
1) "All disputes arising out of the present contract shall be settled by way of arbitration."
An unambiguous language with all the intricacies chalking out the essential elements stating the number of arbitrators, appointment mechanism, seat, applicable law, etc. makes the application of the clause more precise.
2) "Any controversy under this contract shall be referred to arbitration under the rules of......, parties will mutually decide the arbitrators and in case of disagreement between the arbitrators chosen by the parties, it is agreed that the dispute shall be submitted to the courts of
This is an example of a loosely drafted clause where firstly, it is not clear under what rules arbitration would be conducted. Secondly the number of arbitrators and what would render the clause ineffective is ambiguous? Lastly, it is not clear whether parties want to refer their disputes to arbitration or the courts of
The arbitration clause should be wide enough to encompass all possible disputes and claims - this includes breach of contract as well as the claim for damages. The words "disputes relating to" or "arising in connection with the contract" is wider than disputes "arising under" the contract, which a court may interpret as that would include only contractual claims. The former will ensure one-stop adjudication and help in avoiding multiplicity of proceedings. The discretion to define the range of disputes is entirely left to the parties.
Excepted matters can also be specified in the arbitration clause to limit the jurisdiction of the arbitral tribunal. Recently, in the case of
An unambiguous, clear and mandatory arbitration clause would ensure submission of disputes to arbitration.
What must also be kept in mind is that if the dispute is governed under a special statute. In the case of
Another important aspect of conducting effective arbitral proceedings is the composition of the
Recently, in Perkins Eastman Architects DPC and in
Specifying the language is a crucial element of an arbitration clause as it can reduce the potential pool of arbitrators. It is important to specify the language of the arbitration as bilingual proceedings can be very inconvenient and time-consuming. Imagine a case where one party is from
With respect to the "seat of arbitration", the
Further, in
Another crucial aspect is that the parties have to take into account whether they want their arbitration to be supervised and administered by a recognized arbitral institution or whether they want an ad hoc procedure where parties approach the concerned courts for resolving these issues as there is no institution supervising the arbitration. If you use an ad hoc procedure you can still use a set of institutional rules or agree on your own rules and procedures.
Most institutions provide model arbitration clauses which should be adopted if a party has a particular institution in mind e.g. SIAC, ICC, LCIA etc. Interestingly, when an institution is chosen for arbitration proceedings, it becomes contractually binding on the parties to follow the rules of such an institution. One must bear in mind that by choosing an arbitral institution, parties do not choose the home jurisdiction of that institute e.g. seat may be in
Conclusion:
The comprehensiveness of an "arbitration clause" is essential though it need not be in any particular form. What is required to be ascertained is the intention of the parties to settle their disputes through arbitration. The meaning of a contract must be gathered by adopting a common-sense approach, and must not be allowed to be thwarted by a pedantic and legalistic interpretation. An 'arbitration agreement' is a commercial document inter partes and must be interpreted to give effect to the intention of the parties, rather than to invalidate it on technicalities. Therefore, a clause including all terms and conditions must be framed in a language which is not complex and can be easily interpreted. Words like "may" must not be used and should be replaced with "shall" to provide an express agreement to arbitrate.
The seat of arbitration must be pre decided and specified. The language and venue must also be chosen on the basis of convenience of the parties.
Institutional Arbitration must be promoted and given preference over other methods by the parties.
Lastly, owing to unprecedented times due to the pandemic, the only way of conducting hearings is by using virtual platforms. Thus, it is imperative that parties may provide in the arbitration clause that they agree to conduct virtual hearings to avoid any potential challenges which may arise on the principle of natural justice not being followed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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