Member Article

Dating back to the historical conquests of Alexander the Great in the years 300 B.C., which provided an unprecedented foundation for commercial exchanges between Macedonia, Persia and Egypt, along with the Mongolian Empire’s ambitious Silk Road that ensured, since 130 B.C., an unparalleled economic prosperity throughout Eurasia, international commerce has been unequivocally identified as a platform of sustainable economic prosperity, providing business opportunities to all parties involved. Nowadays, the benefits that arise from commercial agreements between parties located in different countries are profound and numerous. To those who navigate these highly rewarding waters, international commerce offers them the opportunity to find differentiated and highly competitive goods or services, which are not otherwise accessible, and through them gain a valuable competitive advantage vis-à-vis their competitors.

Due to the nature of international transactions, it is common practice that international contracts incorporate, either by reference to another agreement, or explicitly within the same agreement, a disputes resolution clause that directs any dispute that arises out of, or in connection to, the present agreement to arbitration for its resolution.

It is important to note that these arbitration clauses set out the foundation and avenues to reach the resolution of a dispute deriving from the contract at hand. As a result, it is imperative that the parties involved receive informed legal advice on this matter prior to the final drafting of the arbitration clause, where legal counsel advises the parties on the possible alternatives they can agree upon to execute an enforceable arbitration clause that conforms precisely with the parties’ intentions at the moment they agreed to formalize the underlying commercial relationship.

In order to properly draft an arbitration clause in an international contract, many arbitration experts agree that “by writing it short and concisely, much is achieved”. In layman terms, this opinion conveys the idea that it is best to base its drafting from a model arbitration clause, generally provided by institutions that administer arbitrations. These institutions offer concise arbitration clauses that touch upon, or incorporate by reference, all required elements. By doing so, the parties avoid the creatively drafted, yet often erred dispute resolution clauses that bring about undesired implications when enforced, or result in a pathological (defective) arbitration clauses that may be found unenforceable. To cast light on this point, the following paragraphs enumerate the key elements that should be considered when drafting an arbitration clause, so as to safeguard the integrity of a future arbitration proceeding.

Firstly, the arbitration agreement must be a binding clause, meaning, it must expose a clear, precise and unequivocal agreement between the parties, submitting disputes to arbitration.

Secondly, the arbitration clause must conspicuously delineate its scope, defining the type of disputes that will be arbitrable under the contract in question. In order words, if the arbitration proceeding were a fishing net, a clearly defined scope will shed light on the circumstances or matters that could be encapsulated by this net. To protect the integrity of a future arbitration, it is generally recommended that the arbitration clause be drafted with a wide, far reaching, scope encompassing any and all types of disputes that may arise under the contract.

A third element to consider is the seat of the arbitration. The term “seat” is more so a legal rather than geographical concept. It determines the judicial system competent to support the arbitration proceeding. The type of assistance competent courts may provide is as follows: (i) in the preliminary steps of an arbitration, they may aid in the appointment of arbitrators, (ii) later on, they may provide interim measures, and (iii) after the completion of the arbitration proceeding, if found appropriate, they may annul the arbitration award. This third element is distinctively important when considering international transactions, since they are usually complex in nature. For instance, the parties involved are probably from different countries, perhaps negotiated the contract in question in a third country, and this same agreement possibly created business operations in a fourth country. As a result, if the seat of arbitration is not clarified, these circumstances would naturally cause confusion over which courts are those competent to support the arbitration proceeding.

Fourthly, the arbitration clause must clearly state if future arbitrations would be administered by an institution, known as institutional arbitration, or by the parties and the arbitrators, known as ad-hoc arbitration. Under this token, it is worth noting that deciding for a highly respected regional or local institution to administer the arbitration is most ideal, by clearly stating so in the arbitration clause. They have ample experience on the matter, provide specialized support throughout the whole arbitration, and dedicate their resources to ensure the integrity and efficiency of the underlying proceeding.

The fifth element, although different in nature, is fairly related to the previous one. It involves the arbitration rules that govern the procedural aspects of the arbitration. Some examples include: (i) the initial submissions of the parties, (ii) the appointment of arbitrators, and (iii) challenges of arbitrators. On this point, if the parties opt for an institutional arbitration, it is most recommended for the parties to choose the arbitration rules of the same institution. On the other hand, if the parties elected for ad-hoc arbitration, best practice strongly conveys that the parties should opt for arbitration rules that are well-known and have been successfully executed in this context. An example: The United Nations Commission on International Trade Law (“UNCITRAL”) Arbitration Rules.

Beyond the aforementioned, there are other elements whose inclusion is optional or even suggested, depending on the facts surrounding the commercial relationship at hand, and the complexity of foreseeable disputes. Examples of these discretionary elements are (i) choosing the number of arbitrators, (ii) the required qualifications for each arbitrator, (iii) the language in which the dispute must be carried out, and (iv) the level of confidentiality applicable to the arbitration.

As an end note, it is important for the parties that will engage in an international commercial relationship to formalize their arbitration agreement in writing, in conformance with Article II of the New York Convention. This international convention serves as the cornerstone for the recognition and execution of foreign arbitral awards. Its consideration becomes imperative in the context of international arbitration, where arbitral awards are likely intended to be recognized and enforced in a country different from the seat of arbitration, perhaps where the losing party has abundant economic resources to pay for the award. Therefore, formalizing the arbitration agreement in writing will effectively protect one of the fundamental aspects of international arbitration: The ability to finalize the underlying proceeding, and obtain an enforceable award that ensures the winning party will be paid for all damages awarded in the arbitration.

In sum, it is important that all aforementioned elements be considered in-depth prior to the final drafting of any arbitration clause, especially in those involving international contracts, so as to ensure that the commercial agreement portrays an enforceable, and effective agreement that reflects the true intention of the parties involved.

Our team, specialized in international business transactions, along with experts in the field of international arbitration, are gladly open to provide legal advice on matters relating to global transactions. Do not hesitate to contact us.