Arbitration clauses – three rules of thumb for in-house counsel

With sufficient time and resources, an in-house counsel can ensure that each arbitration clause their organisation signs onto is carefully crafted and reviewed. But we recognize that time and resources are rarely sufficient and believe that these three rules of thumb can help ensure that arbitral clauses do not create an unacceptable level of risk.

Arbitration clauses can be an afterthought. They appear at the tail end of contracts, typically alongside boilerplate provisions. And in organisations where commercial contract negotiations are handled without lawyers, negotiators can view the clauses as easy give-aways in exchange for an improvement in commercial terms or to signal that they are focussed on relationship building, not future disputes. The result can be an arbitration clause that is vague (“Any dispute arising out of or in connection with this contract shall be settled by arbitration in Switzerland”) or a Frankenstein clause, with incongruous provisions sewn together (Yemeni law to be used in English-language arbitral proceedings with seat and forum in Paris). An in-house counsel in a busy organisation may not have time to review and edit every single arbitration clause that works its way into a contract negotiated by her commercial team, but she can establish some rules of thumb to limit the risk of her organisation signing onto vague or unwieldy arbitration clauses.

The first rule of thumb

Arbitration clauses should specify that the arbitral seat will be a city with a well-established arbitration market. According to the School of International Arbitration’s 2021 International Arbitration Survey, the top five preferred arbitral seats are London, Singapore, Hong Kong, Paris and Geneva. There are good reasons that these cities are preferred. Most importantly, the seat of an arbitration determines the procedural law that applies to the arbitration and the court to which a prevailing party will apply for enforcement of the arbitral award. The cities listed all have efficient courts and well-developed laws and legal traditions. Additionally, the seat is usually the place where arbitral proceedings will take place. Cities that are established arbitration hubs are easy to reach, have facilities that are suited to hosting arbitral proceedings and will likely be home to experienced arbitrators.

The second rule of thumb

There should be a match between the value of the contract and the arbitral procedure specified in the arbitral clause. For a hundred million dollar contract, it may make sense for the clause to specify that three arbitrators will be used and that the arbitration will be governed by the standard, unabridged procedures of an arbitration institution. For a contract worth only ten thousand dollars in a specialised industry sector like maritime or commodities, it is likely to be more practical to specify that only one arbitrator will be used and that ad hoc arbitration rules developed by industry experts will apply. Of course, it is also possible to combine these approaches and provide that, for disputes above a certain value threshold, three arbitrators and a standard institutional procedure will be used, while for disputes below this threshold, one arbitrator and an expedited procedure will be used.

The third rule of thumb

Beware of haggling. When parties are negotiating arbitration clauses which can often happen when commercial points have been agreed and negotiating fatigue has begun to set in – it can be tempting to make simple trades. A party may feel that it is a fair trade to accept that arbitration will be carried out in its counterparty’s native language in exchange for insisting that the arbitration be seated in an international hub (e.g., Russian language arbitration seated in London). Or a party may demand that it be compensated for accepting foreign governing law by having the arbitral seat local (English law, with an arbitral seat in Palermo). But this can lead to arbitration clauses that are unworkable or one-sided. The translation costs for using a counterparty’s native language in arbitration may be prohibitive. And the reliability afforded by choosing a governing law commonly used in international business may be undermined when enforcement will require appearing before a counterparty’s home courts.

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