We noted in our ‘What is arbitration?‘ page that parties may:
- include an agreement to arbitrate (in the form of an arbitration clause) in their main contract;
- separately agree to refer a dispute to arbitration after the dispute has arisen;
- agree to an institutional arbitration; and/or
- agree to an ad hoc arbitration.
Parties may wish to agree to a multi-tiered dispute resolution clause which results in arbitration proceedings being commenced after certain prescribed pre-arbitration steps (such as amicable settlement discussions) have been complied with. In some circumstances, parties may wish to include bespoke provisions in their arbitration agreement to accommodate the nature of the transaction involved (for example, joinder or consolidation provisions).
It is important that parties include a well drafted arbitration clause (or agreement) if they wish to refer a dispute to arbitration. A poorly drafted arbitration clause (particularly one which is ambiguous or unclear as to its terms) can result in the parties incurring significant and unnecessary costs at the start of the dispute resolution process and, in some circumstances, may even be fatal to the arbitration.
Parties also need to be mindful that the arbitration clause meets any mandatory requirements that may exist at the place of arbitration and the anticipated place or places of enforcement.
ADGM Arbitration Centre provides the following guidance on model arbitration clauses. However, given the importance of preparing an effective and enforceable arbitration clause, obtaining independent legal advice is recommended for parties who wish to use arbitration to resolve their disputes.
Core elements of an effective arbitration agreement
An effective arbitration agreement should:
- Contain a clear and unambiguous agreement to refer the dispute between the parties to arbitration. This is crucial, because it is the agreement of the parties to refer their dispute to arbitration which ousts the court’s jurisdiction over the merits of the dispute and provides the arbitral tribunal with the power to determine the dispute. Generally, the arbitration clause should be drafted broadly to include all disputes that may arise out of, or in connection with, a contract to avoid uncertainty as to whether a particular dispute has properly been referred to arbitration (the exception to this is if there is a good reason to carve out certain disputes from the scope of the arbitration clause).
- Nominate the legal place, or juridical seat, of the arbitration. The legal place, or seat, of the arbitration determines which national court has supervisory jurisdiction over the arbitration. In selecting the legal place of the arbitration, parties should choose an arbitration friendly jurisdiction whose courts are likely to be supportive of the arbitral process and lend assistance when called upon to do so.
- Choose between an institutional or ad hoc arbitration, and nominate the arbitral institution which is to administer the arbitration (if that is what is agreed). This is important if the parties want to have their arbitration administered by an institution, as opposed to the arbitration proceeding on an ad hoc basis. For more on the difference between an institutional and ad hoc arbitration, see the link to our webpage ‘What is Arbitration’ here.
- Nominate the rules that are to apply to the arbitration. An agreed set of rules will provide the procedural framework for the arbitration proceedings. The rules will assist both the parties and the arbitral tribunal with the efficient conduct of the arbitration. If the parties have nominated a particular institution to administer their arbitration, they should select the rules of that particular institution. If the parties have elected ad hoc arbitration, they should consider selecting a set of rules purpose built for ad hoc proceedings (such as the UNCITRAL Arbitration Rules).
- Nominate the language of the arbitration. This provides certainty and eliminates any delay if the parties are in disagreement on this when the dispute arises.
- Nominate the number of arbitrators (usually one or three). Again, this provides certainty and eliminates the potential for delay when the dispute arises. Furthermore, different sets of arbitral rules contain different default positions if the parties are unable to agree on the number of arbitrators for their arbitration.
- Describe the process for the appointment of the arbitrator or arbitrators. Institutional rules (along with ad hoc rules such as the UNCITRAL Arbitration Rules) typically provide for the mechanism for the appointment of the arbitrator, or arbitrators, in default of agreement. If the parties agree with the process prescribed in the agreed set of rules, there is no need to set out that process separately in the arbitration clause (a reference to the rules is sufficient). However, if the parties wish to depart from the prescribed process, they will need to set this out in the arbitration clause. In the case of ad hoc proceedings, parties should also designate an appointing authority in their arbitration clause.
- Specify the law of the arbitration agreement. It is considered best-practice (although often overlooked) for the arbitration clause to specify the law which is to apply to the arbitration agreement. The law of the arbitration agreement typically governs matters relating to the scope, application and enforceability of the arbitration clause. In some cases, this may be different to the law governing the underlying contract which, as a matter of good practice, should be specified in a separate governing law clause.
For example, the following clauses for inclusion in an underlying contract document would meet these requirements:
- All disputes arising out of or in connection with this contract, including any question regarding its existence, validity or termination and any dispute regarding non-contractual obligations arising out of or in connection with it, shall be referred to and finally resolved by arbitration administered by [insert name of institution] under [insert name of rules]. The legal place, or seat, of the arbitration shall be Abu Dhabi Global Market. The language of the arbitration shall be English. The number of arbitrators shall be three. The law of the arbitration agreement shall be [insert].
- The governing law of the contract shall be [insert].
Institutional arbitration clause in underlying contract
Most institutions publish recommended or ‘model’ arbitration clauses (and guidance notes) on their websites. If the parties select a particular institution to administer their arbitration, they should use the model arbitration clause provided by that institution as a starting point.
The institutional rules also provide for default positions in relation to such matters as the mechanism for the appointment of the arbitrator or arbitrators. If the parties wish to depart from this, they will need to set this out in the arbitration clause.
Ad hoc arbitration clause in underlying contract
The UNCITRAL Arbitration Rules provide a model arbitration clause for ad hoc arbitration.
It is also recommended that parties designate the appointing authority in the event that the parties are not able to agree on the sole arbitrator, or if one of the parties fails to nominate their party-appointed arbitrator or if the two party-appointed arbitrators fail to appoint the presiding arbitrator.
Agreement to refer dispute to arbitration after dispute has arisen
In the event that the parties wish to refer a dispute to arbitration after the dispute has arisen, similar considerations apply as set out above. In this instance, it is important that the parties broadly, but adequately, describe the nature of the dispute (including any future or other disputes if so agreed) that is being referred to arbitration – ideally by referencing the contract with which the dispute has a connection.
The International Bar Association has published the ‘IBA Guidelines for Drafting International Arbitration Clauses’. These guidelines provide:
- Basic Drafting Guidelines.
- Drafting Guidelines for Optional Elements.
- Drafting Guidelines for Multi-Tier Dispute Resolution Clauses.
- Drafting Guidelines for Multiparty Arbitration Clauses.
- Drafting Guidelines for Multi-Contract Arbitration Clauses.
Parties should refer to these guidelines (as appropriate).