Thought leadership from our experts

Drafting Arbitration Agreements

Arbitration agreements are the essential basis of international arbitration. A successful arbitration starts with a successful arbitration agreement. Unsuccessfully drafted arbitration agreements can face enforcement difficulties, high and unnecessary costs, and delays. IBA Guidelines for Drafting International Arbitration Clauses ("Guidelines") are designated to provide assistance for the drafting of efficient and enforceable arbitration agreements.

Basic Guidelines

Wording of the Arbitration Agreement

The arbitration agreement puts forward the parties' agreement to settle the dispute through arbitration. The parties should use mandatory language, such as 'must' or 'shall,' rather than using permissive language like 'may' or 'might.'

An arbitration agreement would include, all disputes "arising out of," "in connection with," or "relating to" the contract. Such broad terms are important to avoid arguments regarding whether the dispute is within the scope of the arbitration agreement.

Ambiguity should be avoided, primarily to supersede ineffective agreements and to eliminate problematic results, such as enforcement difficulties. It is crucial to understand the parties' intentions in the arbitration agreement.

Parties Should Decide Between Institutional or Ad Hoc Arbitration

In ad hoc arbitrations, the parties have to choose their arbitrators, or address a procedure for their appointment. The parties should also decide upon procedural rules, place of arbitration and language. The parties can prefer to use already drafted rules such as UNCITRAL Arbitration Rules for assistance.

In institutional arbitrations, the institution has the duty to organize the arbitration. The parties should consider the reputation and trustworthiness, rules of the institution, lists of the arbitrators, as well as powers granted to the institution. The parties should select governing arbitration rules and use the model clause provided in these rules. When the parties adopt the model clause recommended by the selected arbitration rules, they can add new points, but should not remove any points.

Parties Should Select the Seat of Arbitration

In making such determination, the parties should consider strategic, practical, and legal criteria. The strategic criteria cover neutrality and effectiveness. In practice, neutrality is guaranteed by selecting the seat of the arbitration not connected to any of the parties. Effectiveness is related to the enforcement of the award.

Practical criteria includes factors such as comfort, security, practical conditions to carry out arbitration activities, costs, hearing facilities, closeness to the parties, witnesses and evidence.

In general terms, the place of arbitration determines intervention of the courts and applicable procedural law. The applicable procedural law is the law of the place of arbitration unless the parties agree to another procedural law.

The institutional rules generally provide that the award is deemed to be made at the place of arbitration. An award is described as "foreign" when it is rendered in a country different than the country in which it is to be enforced.

In the absence of an agreement between the parties, the relevant institution or the arbitrators will fix the seat of arbitration.

Parties Should Determine the Number of Arbitrators

This selection has an impact on the costs, duration and quality of arbitration. If the parties fail to make this determination, the arbitral institution (if selected) will decide upon the number of arbitrators with regard to the complexity and amount of the case. If the parties do not select rules for arbitration, it is important to make this determination in the arbitration agreement. The parties should set the process for selection and replacement of arbitrators. Generally, institutional and ad hoc arbitration rules regulate the methods to select and replace arbitrators.

Parties Should Determine the Language of the Arbitration

The parties must be careful when selecting multiple languages. Multi-lingual arbitrations can be difficult in practice. It may be a challenge to identify arbitrators who can practice in all of the selected languages. Translations and interpretations will create additional costs and delays.

Optional Guidelines

The Authority of the Arbitral Tribunal and the Courts with respect to Provisional and Conservatory Measures

It is rarely regulated in the arbitration agreement. In certain conditions where the availability of provisional and conservatory measures are restricted, the parties can explicitly regulate the authority of the courts and the arbitral tribunal, or decide to modify the applicable arbitration rules.

Confidentiality

Arbitral proceedings are private, and have the potential to be confidential. It may be beneficial to include confidentiality obligations in the arbitration agreement (e.g. trade secrets). It is advisable not to regulate confidentiality in absolute means since, in some instances, disclosure may be necessary for the benefit of one of the parties, or for the enforcement of the award.

Disclosure of confidential information to third parties (such as witnesses or expert witnesses) may also be required and necessary during the preparation of claims, counterclaims and defenses.

Allocation of Costs and Fees

Arbitrators have wide discretion in terms of cost allocation. The parties may allow the arbitrators to decide on costs and fees, or request that arbitrators make no allocation of costs and fees, or request to allocate the costs on a success basis.

Parties Can Set Qualifications for Arbitrators

The parties can agree on certain professional experience, nationality, and any other qualifications they deem to be necessary. Excessive qualifications will create difficulties in the selection of arbitrators.

Finality of the Arbitration

Most of the arbitration rules set forth provisions with respect to the finality of the arbitration. If the parties do not choose a set of arbitration rules, it is important to state in the arbitration agreement that the award is final and not subject to recourse.

Conclusion

The will of the parties is the constitutive element of an arbitration agreement. This will should be clear. The selection between ad hoc or institutional arbitration shall be made in accordance with the particularities of the case. In the case of an ad hoc arbitration, it is advised to refer to the rules already drafted. In the case of institutional arbitration, it is strongly recommended to use the model clauses proposed by the institution. IBA Guidelines may be consulted in the drafting process. Unless there is a particular need, the arbitration agreement should be kept as simple as possible.