International arbitration is currently one of the most popular modes of dispute resolution, particularly in connection with cross-border business transactions. Enforceability in multiple jurisdictions, procedural flexibility, and confidentiality are just some of the most cited reasons why parties choose international arbitration over other forms of settling controversies. Hence, the ability to correctly write an international commercial arbitration agreement is an essential skill for any lawyer. Successfully crafting an international commercial arbitration agreement requires the writer to incorporate certain fundamental elements into the text. Including these elements will ensure that the agreement will address all of the most basic requirements of international commercial arbitration. The following are the elements which a complete international commercial arbitration agreement should contain:
(1) The Seat. The seat of the arbitration should not be confused with its venue. The venue of the arbitration merely pertains to the physical location where the proceedings take place. On the other hand, the seat has more far-reaching, even critical implications. For one, the courts in the seat of the arbitration have the exclusive power to annul the arbitral award. These courts may also have the authority to appoint or remove arbitrators in some Instances. Additionally, courts of the seat have supervisory power over the arbitration or the authority to provide ancillary support to the proceedings.
The extent of this power will vary depending on the jurisdiction. Thus, choosing a seat that has acceptable standards for the annulment of arbitral awards and the appointment or removal of arbitrators is ideal. It may also benefit the parties if the courts in the seat do not tend to intervene in the arbitration proceedings without sufficient cause. Moreover, the enforceability of the arbitral award is dependent on the New York Convention. Accordingly, the seat must be in a State that is a party to the said convention.
Finally, the selection of the seat operates as a choice of law provision picking the procedural law which will govern the arbitration.
For the reasons given above, the choice of the seat is probably the most critical consideration in the arbitration agreement that deserves plenty of thought.
(2) Institutional or Ad Hoc. The parties may choose to have their arbitration administered by an arbitral institution. There are several arbitral institutions across the globe, such as the International Chamber of Commerce International Court of Arbitration, the London Court of International Arbitration, and the Singapore International Arbitration Centre. Each of these institutions has its own set of rules under which it conducts arbitral proceedings.
Institutional arbitration rules address most of the essential aspects of the arbitration, including the initiation of the proceedings, the appointment of arbitrators, and the conduct of hearings. Moreover, arbitral institutions provide many useful services to make the process easier for the parties, such as constituting the arbitral tribunal, fixing the costs of the arbitration, and scrutinizing the award.
In ad hoc arbitrations, on the other hand, the parties are left on their own without the aid and convenience of arbitral institutions with ready-made rules. Thus, parties who resort to ad hoc arbitration must usually rely primarily on domestic legislation to govern the resolution of their controversy. It is no surprise, then, that most counsels advise opting for institutional over ad hoc arbitration. As a bonus, most, if not all, arbitral institutions provide their own model clauses for contract drafters to copy.
(3) Scope of the Arbitration Clause. It is also crucial that the parties define the nature of controversies that may be the subject of arbitration. Depending on the way they word this portion of the arbitration agreement, the parties may either broaden or narrow down the range of issues they may refer to the arbitral tribunal for resolution.
For example, by stating that only disputes arising from or out of the contract may be referred to arbitration, the parties are restricting arbitrable controversies to only those which constitute a breach of the provisions of the contract itself. Such controversies do not extend to matters related to, but not covered by, the contract itself, such as claims based on tort or statute.
At the same time, the parties may also broaden the scope of arbitrable issues by stating that other issues relating to the contract may likewise be the subject of arbitration. Further expansion of the scope of the arbitration is possible by stipulating that all disputes relating to the formation, validity, interpretation, performance, or termination of the contract are also arbitrable.
Conversely, the parties may decide to exclude specific issues from the arbitration by expressly providing so in the arbitration agreement.
(4) Governing Law. In cross-border transactions, there may be several laws governing different aspects of the affair. This principle applies in the case of the arbitration agreement. The law applicable to the arbitration agreement itself may be distinct from that which applies to the rest of the underlying contract. For clarity, therefore, the law governing the arbitration agreement must be specifically identified.
(5) Number of Arbitrators and Their Appointment. Theoretically, the parties are free to appoint any number of arbitrators they want. However, to avoid a deadlock in the decision, the parties should avoid appointing an even number of arbitrators. For small disputes, that is, those involving amounts of USD 3 million or less, one arbitrator should suffice. For larger controversies, having three arbitrators is preferable.
More arbitrators mean more scrutiny of the case from varying perspectives and expertise, which could lead to sounder decisions. Also, each party typically gets to nominate one of the arbitrators, assuring the nominating party that at least one member of the tribunal meets its standards.
Having more than three arbitrators, however, has its disadvantages. Primarily, having more members of the arbitral tribunal will be more costly. Furthermore, it will also entail having more schedules to consider in setting up hearings, making the exercise more complicated. Thus, the choice of the number of arbitrators should generally be limited to either one or three.
The parties may also specify that the arbitrators must possess certain qualifications. Such qualifications may include expertise, experience, training, nationality, or language fluency. The drawback to this practice, however, is that it can make the selection of arbitrators more difficult and may give rise to grounds to challenge arbitrators.
(6) Language of the Arbitration. The language of the arbitration is also an important but often overlooked stipulation in the arbitration agreement. Fluency in the language will allow the parties to appreciate the developments in the proceedings fully and react appropriately. While arrangements for bilingual proceedings and translation services are possible, they may make the proceedings more cumbersome.
Of course, as with any other contractual stipulation, the parties are free to customize their arbitration agreement further. They may include additional provisions for accelerated proceedings, multi-tiered dispute resolution, and, because of the recent coronavirus disease 2019 pandemic, virtual hearings. What is essential, however, is that the basic considerations above must appear and stated in categorical terms.
Tags: Drafting Clause, International Arbitration, Philippines
