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Print articleHe Who Controls The Past Controls The Future: Crafting An Effective Arbitration Provision
June, 2013 - Gustavo J. Membiela and Jordi C. Martínez-Cid
Important Considerations In Drafting An Arbitration Provision: With the continuing increase in cross-border investments, it bears reminding that companies must plan for the eventuality that parties may not see eye-to-eye in the future – something known but not always implemented. With increased investment comes an increased likelihood of disputes involving parties of different nationalities, multinational entities, or foreign sovereigns, which can be incredibly expensive and can seriously affect a client’s bottom line. Resolving cross-border disputes effectively and cost-efficiently requires a clear and thoughtful dispute resolution mechanism. As “[t]he end was contained in the beginning,” so too is an arbitration controlled by the provision contained in the deal documents.
Arbitration allows the parties to control many more aspects of the dispute resolution process than traditional litigation. This flexibility makes it critical that parties draft precise arbitration clauses that specify exactly what they want and how the proceedings should occur. Considering the following topics is fundamental to preparing an arbitration provision that captures the intent of the parties and avoids needless litigation and costs.
1. Conditions Subsequent To The Arbitration
It may be beneficial to require the parties to comply with certain requirements before a formal demand for arbitration is made. Some examples include submission of the claim to administrative process, waiting a number of days until arbitration can be sought, and notice requirements. Including such a provision can assist the parties to better understand each other’s positions prior to initiating an arbitration.
2. Seat Of Arbitration
Of utmost importance is understanding the specific rules and practices of potential forums, which will govern how the arbitration will proceed. Also, certain areas of law, particularly discovery, may be governed by local law contrary to a party’s intent at the time it entered into the agreement. Parties should therefore decide whether they should address discovery or any other additional substantive law or procedure in the arbitration clause. It is critical that practitioners familiarize themselves with the particular forum’s rules before drafting the arbitration clause.
In order to determine which forum is applicable, it is imperative to understand the parties and the nature of the transaction. Generally, some popular arbitration forums, each with their own specific rules and practices are: the International Centre for Settlement of Investment Disputes (“ICSID”), the London Court of Arbitration (“LCIA”), the International Chamber of Commerce Court of Arbitration (“ICC”), the United Nations Commission on International Trade Law (“UNCITRAL”), and the International Centre for Dispute Resolution (“ICDR”), the foreign branch of the American Arbitration Association (“AAA”). Further, certain regional trade agreements provide their own permanent courts to solve disputes, or allow qualifying disputes to be settled in international arbitration.
3. Timing Provisions
The parties can agree on how long an arbitration can take from the demand to final resolution. Setting an unreasonable or unclear time limit can create jurisdictional and enforcement issues. It is important to note that some arbitration forums already impose time limits on a length of arbitration, while others have different provisions that provide for shorten time limits under their rules.
4. Quality And Number Of Arbiters
Parties can agree beforehand how many arbiters should serve and what qualifications they should or should not have. While a greater number of arbiters may help ensure an impartial result, each additional arbiter increases the costs and time necessary to reach resolution. In some instances the parties may agree that the arbiters can be chosen by the arbitration forum, or that the arbitration forum may do so only in the event that the parties cannot agree. Being too specific or demanding in terms of qualifications, however, may lead to delays as finding an adequate, available, and willing arbiter may be difficult.
5. Confidentiality
As opposed to court filings, arbitrations are conducted outside the public record and typically allow for greater confidentiality. Certain forums already have rules providing for confidentiality. Parties, of course, may incorporate specific confidentiality measures in the arbitration provision.
6. Language
The arbitration provisions should make explicit the language the arbitration will proceed under. In the absence of an explicit language provision, some forums such as the LCIA and the AAA provide that arbitrations must be conducted in the language of the arbitration clause, while others, such as the ICC and UNCITRAL, give the arbiter the power to choose the language of the arbitration.
7. “Domestic” Or “International”
Some countries have specific laws that deal with the “domestic” versus “international” categorization of arbitrations, and this can have a significant effect on both the process and outcome of the arbitration.
8. Costs And Attorneys’ Fees
Without a provision dealing with costs and attorneys’ fees, allocation is at the discretion of the arbiter or the arbitration tribunal.
9. Concurrent, Subsequent, And Final Proceedings
A well-drafted arbitration clause should be understood as the exclusive or final resolution of a dispute. While there may be situations where the parties wish to provide for the option of arbitration but not foreclose the right to mediate or otherwise attempt to resolve the dispute in some other manner, the arbitration provision should make explicit the parties’ intent.
While there are inherent risks and costs in any transaction, these can be lessened if parties take the small affirmative step of preparing detailed arbitration provisions.
Arbitration allows the parties to control many more aspects of the dispute resolution process than traditional litigation. This flexibility makes it critical that parties draft precise arbitration clauses that specify exactly what they want and how the proceedings should occur. Considering the following topics is fundamental to preparing an arbitration provision that captures the intent of the parties and avoids needless litigation and costs.
1. Conditions Subsequent To The Arbitration
It may be beneficial to require the parties to comply with certain requirements before a formal demand for arbitration is made. Some examples include submission of the claim to administrative process, waiting a number of days until arbitration can be sought, and notice requirements. Including such a provision can assist the parties to better understand each other’s positions prior to initiating an arbitration.
2. Seat Of Arbitration
Of utmost importance is understanding the specific rules and practices of potential forums, which will govern how the arbitration will proceed. Also, certain areas of law, particularly discovery, may be governed by local law contrary to a party’s intent at the time it entered into the agreement. Parties should therefore decide whether they should address discovery or any other additional substantive law or procedure in the arbitration clause. It is critical that practitioners familiarize themselves with the particular forum’s rules before drafting the arbitration clause.
In order to determine which forum is applicable, it is imperative to understand the parties and the nature of the transaction. Generally, some popular arbitration forums, each with their own specific rules and practices are: the International Centre for Settlement of Investment Disputes (“ICSID”), the London Court of Arbitration (“LCIA”), the International Chamber of Commerce Court of Arbitration (“ICC”), the United Nations Commission on International Trade Law (“UNCITRAL”), and the International Centre for Dispute Resolution (“ICDR”), the foreign branch of the American Arbitration Association (“AAA”). Further, certain regional trade agreements provide their own permanent courts to solve disputes, or allow qualifying disputes to be settled in international arbitration.
3. Timing Provisions
The parties can agree on how long an arbitration can take from the demand to final resolution. Setting an unreasonable or unclear time limit can create jurisdictional and enforcement issues. It is important to note that some arbitration forums already impose time limits on a length of arbitration, while others have different provisions that provide for shorten time limits under their rules.
4. Quality And Number Of Arbiters
Parties can agree beforehand how many arbiters should serve and what qualifications they should or should not have. While a greater number of arbiters may help ensure an impartial result, each additional arbiter increases the costs and time necessary to reach resolution. In some instances the parties may agree that the arbiters can be chosen by the arbitration forum, or that the arbitration forum may do so only in the event that the parties cannot agree. Being too specific or demanding in terms of qualifications, however, may lead to delays as finding an adequate, available, and willing arbiter may be difficult.
5. Confidentiality
As opposed to court filings, arbitrations are conducted outside the public record and typically allow for greater confidentiality. Certain forums already have rules providing for confidentiality. Parties, of course, may incorporate specific confidentiality measures in the arbitration provision.
6. Language
The arbitration provisions should make explicit the language the arbitration will proceed under. In the absence of an explicit language provision, some forums such as the LCIA and the AAA provide that arbitrations must be conducted in the language of the arbitration clause, while others, such as the ICC and UNCITRAL, give the arbiter the power to choose the language of the arbitration.
7. “Domestic” Or “International”
Some countries have specific laws that deal with the “domestic” versus “international” categorization of arbitrations, and this can have a significant effect on both the process and outcome of the arbitration.
8. Costs And Attorneys’ Fees
Without a provision dealing with costs and attorneys’ fees, allocation is at the discretion of the arbiter or the arbitration tribunal.
9. Concurrent, Subsequent, And Final Proceedings
A well-drafted arbitration clause should be understood as the exclusive or final resolution of a dispute. While there may be situations where the parties wish to provide for the option of arbitration but not foreclose the right to mediate or otherwise attempt to resolve the dispute in some other manner, the arbitration provision should make explicit the parties’ intent.
While there are inherent risks and costs in any transaction, these can be lessened if parties take the small affirmative step of preparing detailed arbitration provisions.
