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DRAFTING AN

ARBITRATION
AGREEMENT

Corpuz | De Guzman | Estioko | Lacap |


Panganiban
ARBITRATION AGREEMENT
● A contract by which the parties undertake to submit a current or
future dispute to one or more arbitrators, to the exclusion of the
courts

● Frequently contained in a clause or clauses that are embedded


in the parties’ commercial contract

● Entered into before any dispute has arisen, and is intended to


provide a method of resolution in the event that a dispute does
arise

● Accepted as a distinct agreement, separate from the underlying


agreement (separability principle)
IMPORTANCE OF ARBITRATION AGREEMENT

● Allows businesses to settle disputes quickly and quietly,


without going through the often expensive and time-
consuming legal system

● Confidentiality

● By resorting to arbitration, parties are able to submit the


settlement of their disputes to arbitrators knowledgeable
in the area of specialization which truly forms the basis of
the dispute
ELEMENTS OF AN ARBITRATION
AGREEMENT
Every arbitration clause must answer the following five questions
– who, when, what, where and how, to ensure that there is no
ambiguity in the agreement.
● Who stands for the parties. Who can initiate the arbitration
proceeding in case of the breach of the agreement? Is it only
the contracting parties or also the related parties of these
contracting parties?
● When stands for the nature of disputes. For what all breaches
can the arbitration be initiated? Is it only for disputes arising
out of the agreement or any dispute related to the
agreement?
ELEMENTS OF AN ARBITRATION
AGREEMENT
● What stands for the decision to go to arbitration. It has to be
clearly specified that all the contracting parties have decided to
pursue arbitration in case of the breach of the agreement
because arbitration is not a right but a choice made by the
parties.
● Where stands for seat of arbitration. The Seat of arbitration
includes 3 types of laws that have to be decided by the parties.
● How stands for the procedure of initiating the arbitration
proceedings. It includes deciding different elements like
appointment of arbitrator, fees of arbitrator, time period, and
other procedurals elements.
FACTORS TO CONSIDER IN ARBITRATION
AGREEMENTS OR CLAUSES

1. Venue Clause.
2. Choice of Law.
3. Choice of Arbitration Body.
4. Conditions Precedent to Arbitration.
5. Consolidation/Joinder.
6. Discovery.
7. Duration of Arbitration Proceeding.
8. Awards/Remedies.
9. Assessment of Attorneys’ Fees and Costs.
10. Appeal of Arbitration Awards.
Core Provisions of an Arbitration Clause

1. Choice of the “seat” or legal place of the arbitration.


2. Choice of arbitral institution to administer.
3. Choice of institutional rules.
4. Number and method of selection of arbitrator.
5. Language of the arbitration.
6. Confidentiality
7. Choice of arbitral institution to administer
IBA Guidelines for Drafting International
Arbitration Clauses
1. The parties should decide between institutional and ad hoc
arbitration
● Institutional arbitration may be beneficial for parties with little
experience in international arbitration.
○ If parties choose administered arbitration, they should seek a
reputable institution, usually one with an established track
record of administering international cases
● In ad hoc (or non-administered) arbitration, the burden of running
the arbitral proceedings falls entirely on the parties and, once they
have been appointed, the arbitrators.
IBA Guidelines for Drafting International
Arbitration Clauses
2. The parties should select a set of arbitration rules and use the model
clause recommended for these arbitration rules as a starting point.
● When the parties have opted for institutional arbitration, the choice of
arbitration rules should always coincide with that of the arbitral
institution
● When the parties have opted for ad hoc arbitration, the parties can
select arbitration rules developed for non-administered arbitration, eg,
the Arbitration Rules developed by the UNCITRAL
● Once a set of arbitration rules is selected, the parties should use the
model clause recommended by the institution or entity that authored
the rules as a starting point for drafting their arbitration clause.
IBA Guidelines for Drafting International
Arbitration Clauses
3. Absent special circumstances, the parties should not attempt to
limit the scope of disputes subject to arbitration and should define
this scope broadly
● The scope of an arbitration clause should be defined broadly to
cover not only all disputes ‘arising out of’ the contract, but also
all disputes ‘in connection with’ (or ‘relating to’) the contract
● Less inclusive language invites arguments about whether a
given dispute is subject to arbitration.
IBA Guidelines for Drafting International
Arbitration Clauses
4. The parties should select the place of arbitration based on both
practical and juridical considerations.
● As a general rule, the parties should set the place of arbitration in a
jurisdiction (i) that is a party to the 1958 Convention on the
Recognition and Enforcement of Foreign Arbitral Awards (New York
Convention), (ii) whose law is supportive of arbitration and permits
arbitration of the subject matter of the contract, and (iii) whose
courts have a track record of issuing unbiased decisions that are
supportive of the arbitral process
IBA Guidelines for Drafting International
Arbitration Clauses
5. The parties should specify the number of arbitrators (1 or 3 - an odd
number).
● The number of arbitrators has an impact on the overall cost, the
duration and, on occasion, the quality of the arbitral proceedings
● A three-member tribunal may be better equipped, however, to
address complex issues of fact and law, and may reduce the risk of
irrational or unfair results
● If the parties do not specify the number of arbitrators (and cannot
agree on this once a dispute has arisen), the arbitral institution, if
there is one, will make the decision for them, generally on the basis
of the amount in dispute and the perceived complexity of the case.
IBA Guidelines for Drafting International
Arbitration Clauses

6. The parties should specify the method of selection and replacement


of arbitrators and, when ad hoc arbitration is chosen, should select an
appointing authority.
● In case 1 out of 3 arbitrators resigns, refuses to cooperate or fails to
participate in the proceedings. replacement may not be an option
as it would overly delay and disrupt the proceedings
● Absent special authorization, however, the remaining two arbitrators
may not be able to render a valid and enforceable award
● Most (but not all) arbitration rules therefore permit the other two
arbitrators in such a situation to continue the proceedings as a
‘truncated’ tribunal and to issue an award.
IBA Guidelines for Drafting International
Arbitration Clauses
7. The parties should specify the language of arbitration.
● In making this choice, the parties should consider not only the
language of the contract and of the related documentation, but also
the likely effect of their choice on the pool of qualified arbitrators
and counsel
● Absent a choice in the arbitration clause, it is for the arbitrators to
determine the language of arbitration
○ Leaving this decision to the arbitrators could cause
unnecessary cost and delay
IBA Guidelines for Drafting International
Arbitration Clauses
8. The parties should ordinarily specify the rules of law governing the
contract and any subsequent disputes
● The choice of substantive law should be set forth in a clause
separate from the arbitration clause or should be addressed
together with arbitration in a clause which makes clear that the
clause serves a dual purpose
● By choosing the substantive law, the parties do not choose the
procedural or arbitration law. Such law, absent a contrary
agreement, is ordinarily that of the place of arbitration
IBA Guidelines for Drafting International
Arbitration Clauses

● Optional Elements:
○ The authority of the arbitral tribunal and of the courts
with respect to provisional and conservatory measures
○ Document production
○ Confidentiality issue
○ Allocation of costs and fees
○ Qualifications required of arbitrators
○ Time limits
○ Finality of arbitration
SAMPLE ARBITRATION CLAUSE
ICC

“All disputes arising out of or in connection with the


present contract shall be finally settled under the Rules of
Arbitration of the International Chamber of Commerce by
one or more arbitrators appointed in accordance with the
said Rules.”
SAMPLE ARBITRATION CLAUSE
LCIA
"Any dispute arising out of or in connection with this contract, including
any question regarding its existence, validity or termination, shall be
referred to and finally resolved by arbitration under the LCIA Rules, which
Rules are deemed to be incorporated by reference into this clause.

The number of arbitrators shall be [one/three].

The seat, or legal place, of arbitration shall be [City and/or Country].

The language to be used in the arbitral proceedings shall be [ ].

The governing law of the contract shall be the substantive law of [ ]."
SAMPLE ARBITRATION AGREEMENT
SAMPLE ARBITRATION AGREEMENT
SAMPLE ARBITRATION AGREEMENT
SAMPLE ARBITRATION AGREEMENT
SAMPLE ARBITRATION AGREEMENT
SAMPLE ARBITRATION AGREEMENT
SAMPLE ARBITRATION AGREEMENT
To be enforceable, the arbitration agreement
must...
● The agreement must be in writing
● The agreement deals with differences past, present or
future that have arisen between the parties
● The differences arise out of a defined legal relationship
● The subject matter of the dispute is arbitrable' under local
law
● The parties had capacity to contract when they agree to
arbitrate
● Every appointing and administering authority mentioned in the
clause must exist and be willing to act.
PATHOLOGICAL CLAUSE

● Poorly drafted arbitration clause

● Worse than no clause at all

● Causes delays in the arbitral procedures, but will not


necessarily be considered null, void or ineffective

● May result to unenforceability,

● In consequence, it is strongly recommended to the


drafters to look for a clause of a well known arbitration
centre (institutional) or follow the UNCITRAL rules (ad-
hoc)
PATHOLOGICAL CLAUSE
● Ambiguous → when the parties do not express clearly that in case
of conflict the method to use in order to settle the disagreements
will be arbitration

Any controversy arising out of the performance of the present contract


shall necessary be submitted to arbitration under the rules of…; in case of
disagreement between the arbitrators chosen by the parties, it is agreed
that the dispute shall be submitted to State Courts.

● Hence, parties are compelled to refrain from signing confusing


agreements to arbitrate, because the general rule is that
arbitration is prompted out of the contract, and if there is not an
explicit arbitration clause within the contract it would not be an
agreement to arbitrate.
Common Examples of Pathological Clauses

● Does not appear to make arbitration mandatory

“[Parties undertake] to have the dispute submitted to binding


arbitration through The American Arbitration Association
[hereafter: AAA] or to any other US court. (…) The arbitration shall be
conducted based upon the Rules and Regulations of the
International Chamber of Commerce (ICC 500).”

“In the event of any unresolved dispute, the matter will be referred
to the International Chamber of Commerce”
Common Examples of Pathological Clauses
● Institution not referred to, does not exist or erroneously referred
to

○ The Hamm Court of Appeal in Germany refused to uphold an


arbitration clause which provided that:

“[the Parties] shall proceed to litigate before the Arbitration Court of the
International Chamber of Commerce in Paris with the seat in Zurich“.

○ Court: clause was void because it was ambiguous as to


whether the parties’ disputes should be arbitrated under the
auspices of the ICC or the Zurich Chamber of Commerce, as
each had its own competent permanent arbitration institution
Common Examples of Pathological Clauses

● Naming specific arbitrator


○ A problem arises where the arbitrator is unable or
unwilling to act
○ Where an institution is designated as the arbitrator.

“All disputes arising in connection with the present agreement


shall be submitted in the first instance to arbitration. The
arbitrator shall be a well-known Chamber of Commerce (like
the ICC) designated by mutual agreement between both
parties”.
Common Examples of Pathological Clauses

● Appointing body unable or unwilling to act

“Disputes arising in connection with this agreement shall be


determined by a single arbitrator to be appointed by the Director
General of the World Health Organization” (The Director-General of
the WHO refused to act as appointing authority.

○ As a result, the ICC appointed an arbitrator following the


refusal.
Common Examples of Pathological Clauses

● Inherently inconsistent or convoluted

“In case of any disputes deriving from the [Sales] Contract, the
parties agree that it should be competence of the Arbitration
Court of the International Chamber of Commerce of Zürich in
Lugano. The language of arbitration will be Italian. The law
applied will be Swiss law”

○ Upheld as an ICC arbitration clause and not as a Zurich


Chamber of Commerce clause
Do’s and Don’ts:
Do….

● Keep it simple - ambitious drafting can more easily lead to


pathological clauses.

● Select the seat or legal place of the arbitration with care to


ensure a non-interventionist but supportive judicial system to
underpin the arbitral process.

● Select an arbitral institution able to administer the arbitration


and deal with challenges to arbitrators and appointment in
default agreement.
Do’s and Don’ts:
Do….
● Scrutinise any institutional rules with care - they are not all the
same.

● Select an odd number of arbitrators - provide for three unless


you know for certain that the sums in the dispute will not justify
it - you can always agree later to opt for a sole arbitrator.

● Think about adopting the IBA Rules of Evidence, particularly if


your counterparty is from a different legal culture and so may
have very different expectations about the approach to
evidence and arbitral procedure.
Do’s and Don’ts:
Do...

● Ensure that your contract provides for the governing law of the
contract (preferably separate from the arbitration clause itself).

● If the “seat” and governing law of the contract differ, expressly


provide for the law of the agreement to arbitrate.

● Take care with multi-level dispute resolution clauses so as not


to create preconditions to arbitration which may be incapable
of being satisfied.
Do’s and Don’ts:
Don’t

● Name a specific arbitrator, as they may be unavailable or no


longer alive by the time a dispute arises

● Select a seat or legal place of the arbitration and applicable law


without reviewing the implications

● Be overly prescriptive about the qualifications or experience


required by an arbitrator - this can unduly reduce the pool of
candidates qualified to be appointed

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