Effective arbitral habit now spares litigious blushes later
James Berger, partner at King & Spalding, talks about drafting an arbitration agreement
What must an arbitration agreement include to be enforceable?
Perhaps, like many companies engaged in cross-border transactions, you've decided to arbitrate your disputes rather than have them decided by a court. In order to ensure disputes are properly submitted to arbitration (and that any resulting arbitration is enforceable), the parties will be required to enter into a valid and enforceable arbitration agreement. The agreement sets the arbitrators' "jurisdiction" - where the agreement is not valid, there will be no jurisdiction, and the parties' efforts in arbitrating a dispute may be nothing more than an expensive dress rehearsal for later litigation. Drafting a valid and effective arbitration agreement is, therefore, the key to effective arbitration.
Drafting such an agreement is fairly simple. Most arbitral institutions, such as the Hong Kong International Arbitration Centre, provide model arbitration clauses in their rules; these model clauses are easily accessible on arbitration providers' websites. (See, e.g., hkiac.org/index.php/en/arbitration/model-clauses.)To be enforceable, an arbitration need only state that "any dispute or claim" arising out of the contract shall be settled by arbitration. Most institutional rules (including the HKIAC) take this language one step further so the obligation to arbitrate applies to any claim that the underlying agreement (which will typically contain the arbitration agreement) is invalid, since the inclusion of such language will prevent a party seeking to avoid arbitration from doing so simply by claiming that the contract is unenforceable.
Is there anything else I should consider including in an arbitration agreement?
Including this language in a commercial agreement will make your dispute "arbitrable" and keep it out of court. But because arbitration is governed by contract, parties may, within the limits of local law - generally fairly permissive - tailor an arbitration to suit their needs. To that end, there are additional elements that parties add to an arbitration agreement that will allow the party to maximise the benefits of arbitration and eliminate unpredictability. Following are examples of issues parties address in arbitration agreements:
- "Institutional" vs "Ad hoc": parties may agree to arbitrate under the supervision of an arbitral institution (such as the HKIAC, the International Chamber of Commerce, or any of the many other regional arbitration centres) as opposed to arbitrating "ad hoc". "Institutional" brings many advantages; each institutional arbitration provider provides a set of respected and well-developed rules that will automatically apply and the provider will ensure that any resulting arbitration is conducted in a prompt and professional manner.
- Situs: arbitration agreements may (and should) provide for a legal seat, or "situs," of the arbitration. Arbitrations are governed by the law of the place in which they are legally sited, so parties generally look to "seat" them in a jurisdiction (Hong Kong being one) where local law is supportive of arbitration and the courts uphold agreements.
- Number and qualifications of arbitrators: agreements may provide for the number of arbitrators that will hear any dispute, how they are appointed, and any specific qualifications that they must have (an arbitration agreement in a construction contract may, for example, require that arbitrators hold a degree in engineering or have a certain amount of experience in construction law). Arbitration can be a valuable dispute resolution process, offering time and cost savings and allowing parties flexibility that court proceedings do not afford. But that value depends entirely upon the parties making a valid and effective agreement. So don't think of your arbitration agreement as "boilerplate" or an afterthought in your commercial agreement - pay proper attention to that agreement so that if a dispute arises, you won't be in for any surprises.
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