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13 January, 2017
This guide provides an introduction to international arbitration, explaining what it is and the factors to consider when deciding if it is appropriate. It also looks at developments which should result in an increase in its use by the finance sector and then goes on to address the issues to consider when drafting an arbitration clause.
What is arbitration?
At its simplest, international arbitration is an alternative to national court litigation as a means of resolving disputes; in choosing arbitration parties are opting to have their dispute resolved privately instead of going to a national court.
Key characteristics of international arbitration include:
It is consensual. In some circumstances national courts may assert jurisdiction over a dispute even in the absence of an agreement between the parties to this effect. In contrast, an arbitration tribunal only has jurisdiction if all parties have agreed to submit their dispute to arbitration. This is commonly dealt with by inserting an arbitration clause in the relevant contract. Once agreed to, a party cannot unilaterally withdraw from arbitration.
It is neutral. Hearings can take place in a neutral country where none of the parties are based, and the parties can agree the procedural rules that govern the arbitration, rather than being bound to follow a national court procedure. Usually they choose the procedural rules of one of the well-known international arbitral institutions such as the ICC, LCIA or SIAC. They can also choose the language that the arbitration will be conducted in, rather than being bound to use the language of the national court.
The process is less formal than national court litigation. For example, arbitrations take place in a meeting room, which could be anywhere, rather than a court-room. Typically, hearings will be held in a conference room at a hotel, a law firm's meeting-room or a specialist suite of rooms run by an arbitration institution.
Instead of a judge, the decision-making is by arbitrators who are usually appointed by the parties. Typically a sole arbitrator or a panel of three arbitrators is appointed – referred to as the "tribunal".
Decisions of an arbitral tribunal – the arbitration award – are usually final and subject to limited rights of challenge, unlike the judgments of national courts which typically can be appealed through several further rounds of litigation.
Awards are widely enforceable throughout the world by virtue of the New York
Convention.1
International arbitration and its use in financial transactions: current trends
The finance sector has not embraced arbitration in the same way as other sectors, such as energy, insurance and shipping. Until recently, the general approach in many major financial centres had been to use either the English or New York courts – jurisdictions with which financial institutions are familiar and can rely on to produce sound judgments.
However, the sector has seen an increase in the use of international arbitration for certain types of financial transaction.
The main drivers behind this increase are:
The increasing complexity in the nature of claims involving financial products. The disputes that are arising, for example, disagreements over the results produced by complex financial models and formulaic calculations, require a high level of understanding of both the financial products concerned and the financial markets.
Decisions are also being taken by courts which impact on global markets, for example, decisions on the close-out mechanics of industry standard contracts such as the ISDA Master Agreement. There is a concern that not all national courts are capable of making these decisions, whereas arbitration allows parties to appoint decision makers with the relevant expertise.
The increasing involvement of parties from emerging markets in international finance.
Arbitration is often preferred where enforcement of foreign judgments is likely to be problematic, given the comparative ease of enforcement of international arbitration awards under the New York Convention.
The 2013 ISDA Arbitration Guide
Globalisation is one of the drivers behind the increase in the use of arbitration in derivatives transactions. This prompted ISDA to publish a guide in September 2013 on the use of arbitration in the ISDA Master Agreement. The 2013 Guide included sample clauses for use in both the 1992 and 2002 Master Agreements. As published, it provided options for arbitration in the following seats: London, New York, Paris, Hong Kong, Singapore, Zurich or Geneva and the Hague, and under the following institution's rules: ICC, LCIA, SIAC, HKIAC, AAA-ICDR, Swiss Rules and P.R.I.M.E Finance.
The publication of the Guide inspired the drafting of additional "isdafied" model clauses for a number of other seats and institutions. For example, the Arbitration Institute of the Stockholm Chamber of Commerce has now published an "isdafied" clause for use in the 2002 Master Agreement. It provides for the SCC rules and a seat in Stockholm.
P.R.I.M.E. Finance
The concern over the ability of the courts to deal with complex disputes has resulted in the establishment of an international finance disputes centre: P.R.I.M.E. Finance.2 This is based in The Hague and launched on 16 January 2012. The centre offers mediation, arbitration and other dispute resolution services to the finance sector and has its own arbitration rules which have been adapted to meet the needs of the financial markets. It also has its own panel of experts and arbitrators – which includes representatives from both mature and developing markets, dealers and end-users, legal experts and market experts. The experts are available to either arbitrate disputes or offer their expertise for the benefit of arbitrators and judges in other fora.
The P.R.I.M.E. Finance Arbitration Rules are inspired by, and very closely follow, the UNCITRAL Rules 2010. P.R.I.M.E. kept deviations from the original UNCITRAL text to a minimum, both with a view to the role of the Permanent Court of Arbitration and in order to ensure that, in the case of any ambiguities, reference could easily be made to the commentaries on the UNCITRAL Arbitration Rules 2010. That said, the P.R.I.M.E. Finance Arbitration Rules have been tailored to the needs of arbitration in financial markets and tailored to reflect the fact that they provide for an arbitration institute that will administer the arbitral proceedings (P.R.I.M.E. Finance), whereas the UNCITRAL Rules have been written for ad hoc arbitration. The main adjustments made to the UNCITRAL Rules reflect the market need of speedy resolution of disputes, with the inclusion of several provisions and annexes allowing parties to arbitral proceedings to shorten time frames in several ways.
In line with international arbitration practice, the Rules provide for emergency arbitral proceedings (Article 26a and Annex C together). A party in need of urgent provisional measures, that cannot await the constitution of the arbitral tribunal, may make an application for measures to be rendered by an emergency arbitrator in the form of an order under article 26a and the Emergency Arbitration Rules, which appear as Annex C to P.R.I.M.E. Finance Arbitration Rules. There is also a general provision for expedited proceedings (article 2a). Both the expedited proceedings and the Emergency arbitral proceedings are consensual, requiring the parties' agreement.
The P.R.I.M.E. Finance Arbitration Rules are distinct from other arbitration rules in that awards may be made public with the consent of all parties. P.R.I.M.E. Finance may also publish an award or an order in its entirety, in anonymised form, so long as no party objects to the publication within one month after receipt of the award. These provisions are aimed at supporting the overall goal of P.R.I.M.E. Finance; namely to increase legal certainty through creating a significant body of case law in the area of complex financial products.
The UNCITRAL Rules are well known around the world as well as being well tested, and should form a good basis for arbitration proceedings to be referred to P.R.I.M.E. Financial Services Expedited Arbitration Procedure
A more recent development is the publication of an arbitration procedure aimed at expediting the arbitral process and making it more efficient and less costly. The procedure is the work of the Financial Services Group of the London Arbitration Club, with assistance from the leading arbitral institutions. It is designed to supplement the standard arbitration rules of arbitral institutions and provides optional clauses that can be added to a standard arbitration clause. The procedure is available for download at http://arbitrationclub.org.uk/financial-sector/eplaunch.
Summary procedures now available
One of the reasons commonly given for preferring national courts (and the English courts in particular) is the ability to secure a relatively speedy resolution via the summary judgment procedure. Historically, a similar procedure was not available in arbitration, because of the duty that is commonly imposed on arbitrators to give a "full opportunity" to parties to set out their respective cases. That all changed as of 1 August 2016.
On 1 August 2016, the Singapore International Arbitration Centre's new Rules came into force. The new Rule 29 provides for summary disposal where claims and defences are "manifestly without legal merit" or "manifestly outside the jurisdiction of the tribunal". The SIAC is the first institution to provide for such a procedure, but will soon be joined by the Arbitration Institute of the Stockholm Chamber of Commerce. Its draft rules, due to come into force on 1 Jan 2017, allow tribunals to decide by way of summary procedure not only claims and defences as a whole, but also individual issues of facts or law, and without the high bar ("manifestly without legal merit") set by the SIAC Rules. Under both sets of rules the tribunal has to reach a decision within 60 days.
It is likely that other arbitral institutions will follow suit and adopt similar summary procedures when they next revise their rules.
The Brexit effect
On 23 June 2016 the United Kingdom voted to leave the European Union (Brexit). Although Brexit will not impact on international arbitration, it may result in an increase in the use of international arbitration due to the impact that it could have on court jurisdiction clauses and enforcement of English court judgments within the EU.
Currently, the Brussels Regulation determines the rules applied by EU courts when giving effect to court jurisdiction clauses and the enforcement of court judgments within the EU.3 Those rules will no longer apply post-Brexit and no one knows what regime will replace them. There are various options, including the Lugano Convention, which governs issues of jurisdiction and enforcement of judgments between EU Member States and Iceland, Switzerland and Norway. There is also the Hague Convention on Choice of Court Agreements, which gives effect to exclusive jurisdiction clauses and provides for reciprocal enforcement of judgments amongst parties to the Convention.
Until we know what the replacement will be, there is uncertainty about the enforceability of court jurisdiction clauses and English court judgments within the EU. As a result, where enforcement within the EU is a concern, contracting parties may prefer to incorporate an arbitration provision. As a variant on this, another option would be to agree a "Brexit clause" where, for example, the parties agree that the English courts will have jurisdiction but that, in the event that the UK exits the EU and no reciprocal enforcement arrangements are put in place, disputes will be referred to arbitration in London.
While these developments have resulted in an increase in the use of arbitration by the finance sector, a recent report suggests that awareness of commercial international arbitration within the banking and finance sector remains limited.4 The report highlights the untapped potential of international arbitration in financial disputes, and provides recommendations as to where greater use of it could be made.
However, and as highlighted by the ICC report, whether arbitration is appropriate for a particular transaction will depend on the particular circumstances. It is therefore important that anyone responsible for drafting financial documents understands:
when international arbitration is more appropriate than national court litigation; and
how to draft an arbitration clause.
When will arbitration be more appropriate than litigation?
As noted above the use of international arbitration in finance disputes has risen largely due to the increased involvement of parties from emerging markets. The key issue for banks to date has been the country in which the contractual counterparty is based, or the country in which the assets (and therefore where enforcement will be sought) are based.
While these will remain important considerations, international arbitration offers other advantages that may be relevant to its use. In particular, if P.R.I.M.E. Finance proves to be a successful forum for resolving finance disputes, we may see a general shift away from litigation towards this specialist disputes centre.
Here we focus on the advantages and disadvantages that are relevant to considering whether arbitration is a more appropriate choice.
Advantages
Increasingly banks are dealing with counterparties in emerging markets and with state entities. These parties may not be happy for disputes to be referred to the English or New York courts but may demand that dispute resolution take place in locations that are more conveniently located for them – and the banks may not want disputes to be referred to the counterpart's local courts. International arbitration offers neutrality, in that it allows the parties to choose a neutral "seat" or place of the arbitration (see below for a discussion of that legal concept) and the parties can also ensure that the composition of the tribunal is neutral.
As regards the concern that many national courts do not have the expertise to deal with complex financial products, again arbitration has the advantage in that parties are able to choose the arbitrators and can, if they want, choose an arbitrator with experience and knowledge of the particular industry or financial product.
Another advantage, particularly for commercially sensitive areas such as advisory and M&A work, is the privacy and confidentiality that arbitration offers. Unlike court litigation, an arbitration hearing is not open to the public, and an arbitration award and the documents produced in arbitration are usually confidential.
Other perceived advantages include the procedural flexibility offered by arbitration; the ability to tailor procedures to meet parties' needs is attractive. In addition the finality offered by the limited rights of appeal can, in certain circumstances, be regarded as advantageous.
However, in the context of dealing with parties from emerging markets, the biggest advantage that international arbitration has over national court litigation is in relation to enforcement.
Generally speaking, arbitration awards are easier to enforce than court judgments, because the New York Convention provides an extensive enforcement regime. So, provided that the seat of the arbitration is a country which is a signatory to the Convention, the award should (in theory) be easily enforced in any of the other signatory states (although some states have a better reputation than others for complying).
Currently, there are over 150 signatories, and all the major jurisdictions are covered.5
In contrast, there is as yet no real equivalent for enforcement of court judgments.6 The enforcement problem could be avoided by referring disputes to the national courts where the assets are based but, unless it is familiar with those courts, that will not usually be attractive to a bank. In addition, there is the risk that assets may be moved to another jurisdiction. The starting-point is therefore to look at whether a reciprocal arrangement is in force between the country where the dispute will be resolved and the countries in which any court judgment is likely to be enforced. For example, enforcement within Europe should be fairly straightforward.7 However, if no reciprocal arrangement is in place, international arbitration may be preferable.
Disadvantages
There are disadvantages in choosing arbitration and an awareness of these is required to make a fully informed choice.
Arbitration used to be perceived as providing a quick and cost-effective alternative to litigation. However, this is no longer the case in all countries and speed and cost are often two of the criticisms made of it.
In terms of speed, arbitration can sometimes be just as slow, if not slower, than national court litigation in some countries. Delays can result from the fact that the parties and the arbitrators come from different countries or the practical difficulty of coordinating diaries.
Also, arbitration has no equivalent of the summary judgment procedure often available in litigation – where a claimant or defendant can apply for a quick determination without a full hearing. Having said that, steps are being taken by the arbitration institutions to meet these criticisms and some now provide for summary disposal (see above) and expedited procedures in their rules. Also, international arbitration remains quicker than national court litigation in some jurisdictions (such as India).
Arbitration can sometimes be just as expensive, if not more expensive than, national court litigation in some countries. In addition to the usual fees of the lawyers, experts and advisers, the parties also have to pay the fees of the three arbitrators who are appointed, plus the cost of the venue, and possibly the fees of the arbitration institution.
Another advantage litigation has over arbitration is the ability of judges to join additional partiesto the litigation and consolidate related court proceedings. This saves time and money and avoids inconsistent judgments. Because an agreement to arbitrate is an agreement between the parties to the contract, the agreement is limited to those parties. Arbitrators cannot order joinder of third parties to an arbitration, or consolidation of related arbitration proceedings, however sensible it may appear and however similar the subject-matter of the dispute is in the other potential arbitration. Having said that, appropriate drafting can get round this and arbitration institutions have revised their rules to address this issue.
The advantage of finality in arbitration – in that there is little or no prospect of appealing the final award – means that where arbitrators make mistakes, it is very difficult to remedy that, unlike in litigation.
Arbitration is private and, in general, awards are for most purposes confidential to the parties. Furthermore, although persuasive, an award does not give rise to any binding precedent. Where, therefore, a final and generally binding ruling on the meaning of a standard form contract is required, such as the ISDA Master Agreement, national court litigation may be preferable.
The best of both worlds? Split clauses
The term "split" or "hybrid" clause covers a variety of hybrid dispute resolution clauses, the most common being a clause which provides for both court jurisdiction and arbitration coupled with a mechanism allowing one or both parties the right to determine the procedure once a dispute arises. These clauses tend to be used when one party – usually the bank – has a stronger bargaining position in that they give the bank the right to choose between national court litigation or international arbitration when a dispute arises. So, for example, the clause could provide that disputes are to be resolved in the English High Court but with the bank also being permitted to elect that the dispute in question be referred to international arbitration.
These clauses are increasingly appearing in financing agreements, in particular international derivatives and loan transactions with counterparties in jurisdictions where English court judgments may not easily be enforced. They have the obvious advantage of letting the bank decide which forum it prefers until the dispute arises. So, if it is a matter which can be dealt with quickly and easily, the bank may prefer to go to the English courts where the matter can be determined by way of summary judgment. Alternatively, if assets have been moved and enforcement becomes an issue, the bank can choose to go to international arbitration.
However, caution should be used whenever such a clause is considered. Although valid as a matter of English law other jurisdictions may take a different approach. In some jurisdictions split clauses may be deemed invalid on the basis that they do not provide a proper reference to arbitration (where only one party has the right to refer the matter to arbitration) or they are unfair and against public policy (given that they strongly favour one party). In either case, a bank could find itself facing litigation in the particular jurisdiction it had hoped to avoid or could face difficulties when enforcing any court judgment or award in that jurisdiction. The risks can be minimised by both checking the governing law of the contract to make sure that it recognises their use and validity, and taking local advice in the particular jurisdiction where enforcement is likely to be sought.
Clarity is also essential and it should be clear how the clause is to operate. It is important to set out precisely the circumstances in which the option may be exercised and the extent of control of the stronger party. For example, is the stronger party to have an effective right of veto so that if the other party commences proceedings in the specified forum, the stronger party can then step in, have those proceedings stayed and proceedings commenced in their choice of forum? The sample clause at the end of this guide is drafted on that basis.
Drafting the arbitration clause: key issues to consider
One of the benefits of arbitration is the ability to tailor the arbitration clause to suit the particular circumstances. However, the downside is that if the agreement is unclear or does not satisfy certain requirements, the agreement could be unenforceable and the dispute ends up before a national court. We discuss below the basic drafting principles so that those problems can be avoided.
When drafting an arbitration clause, there are certain key questions that parties must first address:
- which arbitral rules should be used? In particular, is ad hoc or institutional arbitration preferable?
- where should the arbitration take place?
- how many arbitrators should there be?
- Which arbitral rules should be used?
All arbitrations are conducted under arbitral rules which govern the procedure of the arbitration. These can be chosen by the arbitrators themselves but it is better for the parties to specify which rules should be used. A basic choice is between arbitration under "ad hoc" rules and arbitration under "institutional" rules.
Ad hoc arbitration
This is conducted under rules adopted for the purpose of the specific arbitration, without the involvement of any arbitral institution. Here the parties can draw up all the arbitral rules themselves. However, since this can be time-consuming and expensive, they usually either leave the rules to the discretion of the arbitrators or they adopt rules specially written for ad hoc arbitration, for example, the UNCITRAL Rules.8
Institutional arbitration
This is arbitration administered by a specialist institution. Parties should incorporate the rules of the selected institution into their arbitration clause by reference. Such rules are expressly formulated for arbitrations conducted under the administration of the relevant institution.
What are the advantages of institutional arbitration? It can lend political or moral weight to awards but, more practically, because institutional rules are designed to regulate the proceedings comprehensively from beginning to end the institutions are better suited to cater for contingencies that might arise, even if (as sometimes happens) the respondent fails or refuses to co-operate.
There are other advantages: by choosing institutional arbitration the parties can avoid the time and expense of drafting a suitable ad hoc clause; the fees and expenses of the arbitration are, with varying degrees of certainty, regulated, and time and costs can be avoided because arbitrators' fees are settled at the outset, without the need for this to be discussed by the parties and the arbitrators; and some arbitral institutions independently vet awards. Having said that, the additional layer of bureaucracy imposed by institutional arbitration may cause delay and, inevitably, additional fees are payable. Although the arbitrators' fees are reduced because they have less administration to do, the fees of the institution can add a significant amount to overall costs. This is particularly so where large amounts are in dispute and the fees are calculated by reference to the value of the claims (as is the case with ICC arbitration).
Choosing the arbitral institution
There are many institutions to choose from (see examples in the following section). There is no magic formula for choosing between them. Sometimes parties are influenced by differences in the rules themselves, sometimes by familiarity, and sometimes by their opinion of the international acceptability or reputation of a given institution and/or its cost and speed. Others prefer to choose the institution nearest the seat (e.g. London seat – LCIA; Singapore seat – SIAC) as arbitral institutions at or near the seat of arbitration are usually best placed to appoint the best arbitrators in that location and it is more convenient and time and cost efficient. A common fallback position is to choose the ICC as the ICC is generally perceived to be the most "international" and therefore neutral of the arbitral institutions. It also has links in most countries via its National Committees.
Ashurst can, on request, provide a comparison of the different institutions and their rules but questions to ask include:
- What is the reputation and experience of the institution?
- How much institutional involvement will there be?
- Are there any particular features of the rules (e.g. expedited arbitration or emergency arbitration) which could be useful?
- Is the institution well placed to appoint suitable arbitrators for the dispute?
As a general rule, newly formed institutions or institutions without a proven track record should be avoided.
Well-known arbitral institutions
Copies of the rules and recommended wording for arbitration clauses are published by the above institutions on their websites. These may need supplementing. Sample clauses for LCIA and SIAC institutional arbitration and also for ad hoc arbitration using the UNCITRAL Rules appear at the end of this guide.
Where should the arbitration take place?
Where the arbitration should take place is one of the most important matters to specify. This is called the "seat" of the arbitration and it is a legal concept that ties the arbitration into a legal jurisdiction. Usually expressed as a city, the key aspect is the jurisdiction in which the seat is located as it is the procedural law of that jurisdiction that will govern the arbitration. Getting the seat (and therefore choice of procedural law) right is crucial as it can affect:
- whether the courts of the seat will intervene in the arbitration;
- whether any other rules are imposed, in addition to the arbitral rules chosen by the parties;
- whether the dispute is "arbitrable" in that country, that is, whether the subject-matter is something over which the local courts reserve exclusive jurisdiction so that it cannot be submitted to arbitration;
- the possibility of the arbitral award being challenged or appealed; and
- the enforceability of the arbitral award.
In making this choice the parties must consider both the legislation enacted in the particular jurisdiction relating to arbitration, and the attitude of the national courts towards arbitration generally in that jurisdiction.
Legislative framework
Most countries have legislation governing arbitrations that take place in their territory.
This does not replace the arbitral rules chosen by the parties but provides a framework in which those rules operate. The UNCITRAL Model Law on International Commercial Arbitration is intended to even out disparities between these national laws and suggest a common standard. Its objective is to provide comfort to parties investing in countries which have adopted it.9 The Model Law tries to restrict unnecessary court intervention. Other countries have been influenced by the Model Law when adopting new legislation.
For example, the English Arbitration Act 1996 draws on many of the elements of the Model Law and goes a considerable way towards achieving similar results.
Generally speaking parties can rely on legislation based upon the Model Law (although some countries have introduced amendments that depart significantly from the Model Law). If the local arbitration law is not based on the Model Law, however, parties should not select the location without first investigating the likely impact of its legislation on any arbitration. For example, local law may require mandatory procedures to be implemented; the courts may be able to intervene excessively during the arbitration (or at the other extreme, they may have no power to support an arbitration); and there may be barriers to enforcement of awards, including allowing avenues for appeal.
Finally, it is important that the country chosen has ratified the New York Convention. This is because some countries which are signatories to the Convention will only allow enforcement of awards which have been made in countries which are also signatories to the Convention. Over 150 countries have ratified the Convention, including most of the world's leading trading nations. A full list of countries is available on the UNCITRAL website.
Approach of the courts
It is also worth noting that a country may aim to be seen as a modern, favourable forum for international arbitration, but in practice when the courts become involved, an arbitration may be delayed for many months, if not years.
Countries/territories which have legislation and courts that are generally accepted to be favourable to the efficient operation of arbitration include (in alphabetical order): England, France, Hong Kong, Singapore, Sweden, Switzerland and the USA (New York).
How many arbitrators should there be?
The parties can specify the number of arbitrators in the arbitration clause or leave this to be determined under the relevant rules once a dispute has arisen. Usually an arbitration is heard by either one or three arbitrators. An arbitration will be less expensive and involve less delay if the parties provide for a sole arbitrator. Appointments for meetings and hearings can be more easily arranged, a sole arbitrator does not need to spend time deliberating with fellow arbitrators in order to reach a decision and, in general, the arbitrator fees for an arbitration conducted by a sole arbitrator is likely to cost, overall, about half as much as the arbitrator fees for an arbitration conducted by three arbitrators. The disadvantage of having a sole arbitrator is there is a higher chance of errors in the decision as only one person makes the award.
In an international dispute, the more usual procedure is to provide for the appointment of an arbitral tribunal of three arbitrators. Where the tribunal is to consist of three arbitrators, the procedure usually adopted is for each party to nominate an arbitrator and for a "neutral" third arbitrator (usually the presiding arbitrator or chairman) to be appointed either by agreement between the two party-nominated arbitrators or by agreement between the parties. This has the advantage that each party has a greater sense of investment in the arbitration in that each party has been able to nominate one arbitrator of its choice to listen to its case. It also ensures that at least one arbitrator is familiar with the national or legal culture of the country where the relevant party is based.
If you are choosing arbitration because you want your disputes to be decided by someone from the same industry or who has particular expertise, it is sensible to set this out in the arbitration agreement. It is common to see arbitration clauses where the parties agree that an arbitrator should be a member of a particular organisation or should have particular qualifications. However, be careful not to define the qualifications too narrowly as there may then be an insufficient pool of arbitrators who are able or willing to accept appointment. Again, if PRIME Finance does prove to be a success, one way round this may be by just specifying that the arbitrators have to be selected from the panel of experts and arbitrators on PRIME Finance. In addition, you should never specify a named individual as that person may be unable or unwilling to act when the dispute arises and then the arbitration clause would be unenforceable.
Other factors to consider when drafting an arbitration clause
Choice of law
Choice of law clauses are separate from arbitration clauses, since these set out the applicable law regulating the parties' rights and obligations, by which substantive questions are to be judged. In contrast, an arbitration clause sets out the mechanism by which a dispute is to be resolved. However, choice of law clauses are often combined with arbitration clauses, so parties may have to consider this when drafting the arbitration clause. It is important to appreciate the distinction between the governing law of the contract, the procedural law of the arbitration, and the law applicable to the arbitration clause.
Governing law of the contract
Parties should select an appropriate governing law carefully. The governing law of a contract can be pivotal not only to its formation and validity but also to the question of whether disputes arising under or in connection with the contract can be submitted to arbitration, and what remedies can be awarded by the arbitrators. It is always advisable, therefore, to specify the governing law when drafting the contract. Where the parties do not select a governing law, the choice will be made for them by the arbitrators.
Procedural law
The procedural law in an arbitration is different from the governing law of the contract: this is the law by which the arbitration will operate (such as the UNCITRAL Model Law). The procedural law is normally the law relating to arbitration in the seat of the arbitration. It is not advisable to specify in the arbitration clause a different procedural law from the procedural law in the seat of the arbitration.
Law applicable to the arbitration clause
Under the widely-accepted principle of "separability", an arbitration clause is considered to be separate from the contract in which it resides. This means that the arbitration clause survives termination of the contract and allows any claims arising out of that termination to be referred to arbitration. It is generally assumed that where no separate choice of law for the arbitration clause is made, the governing law of the contract is also the governing law of the arbitration clause. It is therefore unusual in such a situation to specify the governing law of the arbitration clause.
However, where the law of the underlying contract differs from the seat, e.g. English governing law but Paris seat, there may be uncertainty over whether the governing law of the arbitration clause is the same as the governing law of the main contract, or whether it should be the law of the seat. In this situation, it is sensible to specify a governing law of the arbitration agreement. Current practice is in favour of the law of the arbitration agreement being the same as the law of the seat, as it is the courts of the seat that will decide issues of interpretation or validity of the arbitration agreement. If it is to follow the law of the underlying contract, make sure that the governing law clause expressly refers to the arbitration clause (e.g. "This contract, including the agreement to arbitrate at clause…, is governed by French law").
Scope and validity of the arbitration clause
Generally, arbitration clauses will cover all disputes arising out of the relevant contract and national courts and arbitral tribunals will not favour arguments that say that certain disputes do not fall within the wording of the clause as a matter of construction.13 Also, another result of the principle of separability discussed above is that an arbitration clause will remain valid even if the contract in which it is found is alleged to be invalid. Moreover, there are limited grounds to challenge the validity of an arbitration clause itself. The New York Convention provides that the courts of a signatory country must uphold an arbitration clause unless the clause is "null and void, inoperative or incapable of being performed".
Choice of language
It is advisable to provide for the language of the arbitration as this will determine the language of the written and oral submissions in any hearing. If not specifically provided for, the tribunal will decide the language.
Multiple related contracts
As mentioned above, one of the disadvantages of arbitration is that arbitrators, unlike judges, do not have the authority to join additional parties to the arbitration or consolidate related arbitrations. Where there are inter-related contracts, and the parties want any related disputes to be heard together or want the ability to join into the arbitration the various parties to the different contracts, it is possible to cater for that. However, drafting such a clause is not straightforward and detailed advice should always be sought on a case-by-case basis.
Confidentiality
If confidentiality is a concern, it is sensible to insert a confidentiality clause as the approach to confidentiality can vary as between different arbitral institutions and different jurisdictions. Several of the institutions provide standard wording for such clauses.14 Alternatively, choose arbitration rules (such as the SIAC Rules) which have express confidentiality provisions.
Excluding rights to appeal
Parties can agree to exclude the right to appeal on a point of law in order to ensure that an award is final and binding, to the extent the exclusion is permitted by the laws of the relevant state. Institutional rules (such as the ICC and LCIA rules) may also include this exclusion. In some jurisdictions it is possible to exclude the right to appeal in any circumstances, but this is not recommended as it leaves parties with no redress in the event that there is an abuse of process.
Sample clauses
Institutional arbitration
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 [ ].
SIAC clause
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 in Singapore in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (SIAC Rules) for the time being in force, which rules are deemed to be incorporated by reference in this clause.
The Tribunal shall consist of [one/three] arbitrator(s).
The language of the arbitration shall be [ ].
[The law of this arbitration agreement shall be [ ] law.]
Ad hoc arbitration
UNCITRAL Rules
Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force.
UNCITRAL also advises that the parties may wish to consider adding:
(a) The appointing authority shall be … (name of institution or person);
(b) The number of arbitrators shall be … (one or three);
(c) The place of arbitration shall be … (town or country);
(d) The language(s) to be used in the arbitral proceedings shall be …
Split/hybrid clause
1. For the benefit of the Bank and subject to clause 2 below, the parties irrevocably agree that the courts of England shall have exclusive jurisdiction to hear and decide any suit, action or proceedings, and/or to settle any disputes arising out of or in any way relating to this agreement or its formation or validity and, for these purposes, each party irrevocably submits to the jurisdiction of the courts of England (the Dispute).
2. Notwithstanding clause 1 above, [counterparty] hereby agrees that the Bank shall have the exclusive right, at its sole option and for its benefit, to refer any Dispute to be 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 3. The seat, or legal place, of arbitration shall be [London]. The language to be used in the arbitral proceedings shall be English.
3. For the avoidance of doubt, the right of the Bank to refer a Dispute to arbitration under clause 2 above shall be exercisable even if [counterparty] has or has purported to commence proceedings under clause 1, save where the Bank has consented to such commencement or has participated in those proceedings so as to render it inequitable to cause those proceedings to be stopped. Where the Bank is permitted to elect arbitration proceedings in accordance with this clause, notwithstanding the commencement of proceedings under clause 1 above, the parties shall take all steps and do all things necessary to ensure that the court proceedings are stayed in favour of the arbitration proceedings.
1. The UN Convention on The Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).
2. The Panel of Recognised International Market Experts in Finance. More information is available from their website: http://www.primefinancedisputes.org/.
3. Regulation (EU) No 1215/2012 on jurisdiction and enforcement of judgments in civil and commercial matters (recast).
4. The report was published in November 2016 by the International Chamber of Commerce Commission on Arbitration and ADR (the ICC). The ICC set up a Task Force to study financial institutions' perceptions and experience of international arbitration. The report is the product of interviews with approximately 50 financial institutions and banking counsel. It is available on the ICC website. The report noted that of those interviewed, the majority do not have substantial experience of international arbitration and, where it is used, it is not used on a consistent basis or on a large scale. The findings indicated a general lack of awareness of its potential benefits and misconceptions about the process and its suitability for finance disputes.
5. See the UNCITRAL website for a list: http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NY
Convention_status.html.
6. The Hague Convention on Choice of Court Agreements of 2005 is the litigation equivalent of the New York Convention. It came into force on 1 October 2015. However, to date only Mexico, the EU and Singapore have ratified it. The US has signed but not yet ratified it. It will be a while before it has the impact of the New York Convention.
7. Under the reciprocal enforcement treaties in place: Regulation (EU) No 1215/2012 on jurisdiction and enforcement of judgments in civil and commercial matters (recast) (commonly referred to as the Brussels Regulation) and The Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters.
8. The United Nations Commission on International Trade Law Arbitration Rules (as revised in 2010), available online at: http://www.uncitral.org/pdf/english/texts/arbitration/arb-rules-revised/arb-rules-revised-2010-e.pdf. Please note that UNCITRAL is not an arbitral institution and does not administer arbitrations. Also note that ad hoc arbitration is not recognised in China.
9. The UNCITRAL Model Law was published in 1985 and revised in 2006. Legislation based on it has been enacted in 58 jurisdictions, including Australia, Canada, Egypt, Germany, Hong Kong, India, Japan, Mexico, Nigeria, Korea, Russia, Singapore, Spain, Scotland, and certain states in the United States (including California and Texas). For a full list see: www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_
arbitration_status.html.
10. www.uncitral.org/uncitral/en/uncitral_texts/arbitration/
NYConvention_status.html.
11. Note that an appropriate choice still needs to be made for the particular circumstances. For example, you may choose a seat that is generally regarded as a good seat for arbitration, but awards made there are not enforceable in the jurisdiction of your counterparty.
12. There are separate Ashurst Quickguides which deal with governing law clauses.
13. For example, the English courts have given strong support to the proposition that arbitration clauses should be liberally construed. See Premium Nafta Products Ltd and others -v- Fili Shipping Company Limited and others [2007] UKHL 40.
14. The LCIA, for example, provides wording that can be adapted.
For further information, please contact:
Ben Giaretta, Partner, Ashurst
ben.giaretta@ashurst.com
