Drafting the International Arbitration Clause

presented by William G. Horton November 9, 2005 CBA – Business Dispute Resolution Committee (National Section on International Law)

What is a Dysfunctional Arbitration Clause

Clause which deprives parties of the essential benefits of arbitration: – Party Autonomy – Flexibility – Confidentiality – Expedition

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What makes a Clause Dysfunctional #1

• • • Gives rise to disagreements which can not be resolved by the parties or the arbitral process itself Creates an opportunity for “strategic” non-co-operation Usually leads to Court involvement and delay: i.e. not arbitration instead of litigation but arbitration and litigation

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What makes a Clause Dysfunctional # 2

• • Sets unrealistic conditions or limitations for the arbitration itself Creates a “mismatch” between the procedures available in a particular institution or place where the arbitration will be sited and the provisions of the clause

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Multi-Step Dispute Resolution Clauses #1

• • • Can be very useful, especially when the parties to the agreement are large organizations Can be a trap, if it is set up as a precondition to arbitration Excuse for one of the parties to go to court to stay the arbitration alleging that dispute resolution process has not been followed

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Multi-Step Dispute Resolution Clauses #2

• Good intentions can lead to bad results when “good faith negotiations” are made a pre-condition to arbitration

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Multi-Step Dispute Resolution Clauses #3

• • Consider adding a clause that says explicitly whether completion of multi-step ADR is or is not a pre-condition to arbitration If made a precondition, consider providing that any dispute re satisfaction of the pre-condition shall be decided by the same arbitrator(s) to whom the underlying dispute is submitted and that the arbitrator(s) may stay the arbitration to allow for the satisfaction of the pre-condition

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Scope of Dispute

• • • Classic objection is to say that dispute is outside the scope of disputes which were referred to arbitration by the agreement Arbitration can be stayed or award will be set aside if dispute is outside the scope of the agreement Either make the clause very broad (“all disputes with respect to, arising under or in any way related to this agreement, including any dispute with respect to the existence, validity or enforceability of this agreement or any of its terms”) or make the clause very narrow and specific

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Parties to the Dispute

• • Consider whether all parties who are necessary to resolving the dispute are parties to the underlying agreement and/or the arbitration agreement Where the immediate parties are undertaking obligations on behalf of parents, subsidiaries or related parties, demonstrating agreement of these parties to submit to arbitration may be crucial

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Minimizing Court Intervention

• • • • Eliminate any right of appeal to or review by the courts Provide for supervision of the arbitration by an arbitral institution Provide for arbitration to be held in a jurisdiction with an arbitration statute based on the UNCITRAL Rules Provide for an appointing authority

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Arbitral Institutions and Appointing Authorities

• • • Ensure that the arbitral institution or appointing authority named in the clause exists and is properly named: (e.g. there is no Canadian Arbitration Association) Ensure that arbitration fits within the institution’s jurisdiction or mandate (e.g. ICSID generally available for investor state arbitration pursuant to treaty) Visit the web site or call if you are not familiar with a particular body

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Appointment of Arbitrators #1

• • • • Clause must specify a non-court method of appointing the tribunal that works even if one of the parties to the dispute fails to co-operate Best method is to use an institution or appointing authority Also relatively easy in ad hoc arbitrations if using a tribunal of three arbitrators (but court will need to deal with challenges) Hard to do for a tribunal consisting of a single arbitrator unless arbitral institution or appointing authority is used

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Appointment of Arbitrators #2

• • If using an arbitral institution: make sure you understand the parameters they will use for appointing (will they appoint from a panel, what is their track record for appointing certain types of arbitrators e.g. retired judges, non-lawyers) If using an appointing authority (e.g. the head of some regulatory body or professional organization): make sure they are willing to exercise the authority

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Appointment of Arbitrators #3

• If the appointing authority is a person, make it clear whether the intention is to appoint the current holder of the office or the holder of the office (or any equivalent of that office) in the future

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Appointment of Arbitrators #4

• • • Specify arbitrator qualifications, if desired but: If too specific, might not be able to locate a qualified candidate who is willing and available Consider pre-appointing arbitrator (and mechanism for possible replacement) if time will be of the essence

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Arbitral Procedure #1

• • • Failure to specify procedure gives discretion to the arbitrator: best in most cases Specifying UNCITRAL Arbitration Rules or any modern arbitration statue (e.g. the Ontario Arbitration Act) leads to the same result May want to strengthen arbitrator’s discretion by specifically stating that procedures may be abbreviated or adapted as necessary having regard to the complexity or urgency of the matter and the amount in issue

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Arbitral Procedure #2

Parties may choose to be more specific about procedures but be careful: 1) Any departure from specified procedures may give rise to argument that arbitrator lost jurisdiction 2) If specified procedures (e.g. strict time limits) become impractical one side may say that minimum standard of fairness has been breached (result: court application to stay arbitration, extend time limits or set aside award)

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Arbitral Procedure #3

• • If institution is used, procedures specified by the parties may not fit with institution’s procedures (e.g. ICC scrutiny of award before release may result in delay) Also, if parties specify the Rules of a specific institution but do not explicitly say that the institution will supervise the arbitration, a dispute could arise as to the extent to which the institution is to be involved

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Pre-Hearing Production and Discovery

• • Extent of production should be specified in an international contract between parties from different legal cultures: especially if your client has an expectation that there will be such procedures Ensure that sole arbitrator or chair of three arbitrator panel (or at least one of the three arbitrators) has some experience with common law production and discovery, if this is what you want

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Place and Language

• • Essential to specify place where arbitration to be held in any contract Essential to specify language in contract between parties with different languages

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Law of the Arbitration #1

• • Law of arbitration will be law of place where arbitration is held, unless parties specify otherwise (but unwise to specify otherwise) Important to check law of place where arbitration is to be held, especially if it is not a familiar, well established location for arbitration with a modern arbitration statut

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Law of the Arbitration #2

• • • Arbitration may not be recognized where arbitration is held (e.g. an ICC arbitration held in Beijing will not be recognized or supported by Chinese courts) Some issues may not be arbitrable under the local law where the arbitration takes place (e.g. statute based claims) Best to get local (or even better, institutional) advice re law and available facilities for arbitration before agreeing to site an arbitration in an unfamiliar location

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Conclusion #1

• • When drafting an arbitration clause after a dispute has arisen it is very easy to craft a clause that exactly fits the dispute The same is generally true if a clause is drafted before a dispute has arisen but where the type of dispute to be arbitrated is very clearly defined and known in advance

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Conclusion #2

• In cases where a clause is being drafted before any dispute has arisen and where a wide variety of disputes might arise: 1) Use a simple clause.

2) Name a recognized arbitral institution to conduct the arbitration under its own rules.

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Conclusion #3

3) Specify the place in which the arbitration will be held (a location that has modern arbitration legislation, good facilities and a track record for hosting successful arbitrations and is equally convenient or inconvenient for both parties) 4) Specify the language if necessary.

5) Add only those minimum specifications which are needed to meet your clients expectations, e.g. single arbitrator or three, in a domestic arbitration whether an appeal to the courts is allowed, any clarification re rights of production and discovery, and confidentiality of the arbitration.

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