What to consider when choosing and using arbitration agreements

As part of our Back to Basics series, here we look at how arbitration differs from other types of dispute resolution, how to administer it, key terms and points to consider in agreeing the type of arbitral proceedings that will suit the type of dispute you may be dealing with.

How does arbitration differ to other types of dispute resolution?

Arbitration differs from court litigation in that arbitration is generally consensual, meaning that parties must agree to arbitrate. A dispute cannot be arbitrated unless the parties have expressly agreed that it can be. An agreement to arbitrate can be contained in a standalone document, and it can be agreed by the parties at any time but is more commonly agreed at the outset of a contractual relationship and contained within the terms of the main contract. In this format, the agreement to arbitrate is still considered a separate contract – an “arbitration agreement” or “arbitration clause”. The “separability” of an arbitration agreement from the rest of a contract means that the arbitration agreement will not suffer if, for example, the validity of the main contract is challenged.

While parties might agree an arbitration agreement at the outset of a contract, by the very nature of things, an arbitration agreement becomes relevant once there is a dispute. At this point, relationships might have broken down and the parties’ interests may no longer be aligned. Uncertainty in an arbitration agreement can give a party, the respondent, an opportunity to dispute the effectiveness or validity of the arbitration agreement.

The effect of this will most likely delay dispute resolution and increase costs, but also has the potential to derail the arbitral process, leaving the parties in the relevant local courts rather than with the intended benefits of arbitration. Therefore, an arbitration agreement must be clearly and properly drafted to give effect to the parties’ agreement to arbitrate.

The laws of an arbitration agreement

The parties’ rights and obligations to arbitrate are founded in the arbitration agreement. An arbitration agreement may be subject to formalities – for example, the English Arbitration Act 1996 requires an arbitration agreement to be in writing.

An arbitration agreement might intend to cover all disputes that could arise out of, or in connection with a contract. A particular jurisdiction might have statutory exclusions to arbitration but, notwithstanding, parties may also wish to carve out particular types of dispute they would prefer to be submitted to court. Any such carve out must be clear and unambiguous.

The substantive disputes will be subject to the law of the main contract, but parties may choose different laws for the arbitration agreement and the arbitral procedure.

• The procedural law, also referred to as the lex arbitri, curial law or loi de l’arbitrage, is generally determined by the “seat” of the arbitration – the seat being the jurisdiction where the arbitration is said to take place. It governs many of the practical aspects of the arbitral proceedings, such as disclosure, and the courts of the seat will have supervisory jurisdiction over the arbitration, including in relation to interim remedies and appeals. Here, it is relevant to understand the differences between common law and civil law jurisdictions when it comes to legal proceedings. Commonly chosen international arbitration seats are London, Singapore, Hong Kong, Paris and Geneva.
• The law of the arbitration agreement, which governs disputes as to the validity or scope of an arbitration agreement, is often the same as the law of the contract or the seat but it can be expressed to be another law.

This ability to choose laws and jurisdiction makes arbitration very attractive for international construction contracts – parties may want to avoid courts in the location of their project or, simply, to choose a neutral forum for any disputes.

The administration of an arbitration – arbitral institutions and ad hoc arbitrations

An arbitration will be conducted under a set of rules. There are a number of arbitral institutions whose rules provide a framework for the proceedings and, for a fee, can also administer an arbitration. This might include managing and paying the tribunal and reviewing an award. In our experience, the majority of international arbitrations are administered by one of the arbitral institutions under a set of rules, and popular choices are the rules of the International Chamber of Commerce (ICC), Singapore International Arbitration Centre (SIAC), Hong Kong International Arbitration Centre (HKIAC), London Court of International Arbitration (LCIA) and China International Economic and Trade Arbitration Commission (CIETAC). There are also various industry specific rules, such as those of the International Centre for Settlement of Investment Disputes (ICSID) for the resolution of disputes between governments and foreign investors.

Parties can also agree to ad hoc arbitration rather than institutional arbitration. In an ad hoc arbitration the rules are set by either the tribunal or the parties, or the parties might agree to use a particular set of rules. In international commercial arbitration, parties often choose the UNCITRAL Rules. The consensual nature of arbitration means that the parties can agree combinations of rules and institutes – for example, an arbitration subject to the United Nations Commission on International Trade Law (UNCITRAL) Rules could be administered by the LCIA.

Appointing the arbitral tribunal

Parties are also free to agree on the mechanism to appoint an arbitral tribunal. The tribunal might be a sole arbitrator or a tribunal of three arbitrators. Parties can include a mechanism in the arbitration agreement to appoint the tribunal, but it is advisable to include a fall back provision in the event that the parties cannot agree. At this point, an option might be for the chosen arbitral institute to step in to appoint the tribunal. Regardless, this is only done with the parties’ consent.

Parties can also specify particular traits that they would like an arbitrator to have – for example, particular industry or legal expertise may be required. Although caution should be exercised here, it is very easy to introduce ambiguity when specifying characteristics and also to unrealistically narrow the pool of arbitrators that can be appointed. Naming specific arbitrators is also not recommended, since an element of uncertainty will be introduced if they are unable to act.

Other terms of an arbitration agreement

One of the benefits of international arbitration is often cited to be the confidentiality it offers parties, as opposed to the public nature of court proceedings. However, in many jurisdictions, arbitration is not confidential, and whether or not an award is confidential will also depend on the arbitral rules chosen. Some of the arbitral institutions now strive to publish the names of parties or the awards. This is normally done only with the parties’ consent or is subject to an option to opt out, but it is advisable to clarify in the arbitration agreement if any awards are to be kept confidential.

As with any contract, the arbitration agreement can go further to address how the parties would like any arbitral proceedings to progress. There might be statutory provisions, such as rights of appeal which the parties would like to exclude or confirm. The English Arbitration Act 1996, for example, allows parties to agree to exclude a right to appeal on a point of law (Section 69), but parties cannot exclude a right to challenge an award on grounds of serious irregularity (Section 68).

In general, arbitral proceedings are only worthwhile if they will result in an enforceable award. Parties should ensure they are satisfied that an award will be enforceable in the jurisdiction where their counterparty is resident and/or has assets. This might include ensuring that:

• the other party has capacity to arbitrate, since in some jurisdictions state entities cannot; and
• the issues that are arbitrated are issues that can be arbitrated in the jurisdiction in which enforcement might be sought.

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) requires the courts of its contracting states to give effect to arbitration agreements and enforce arbitration awards made in other contracting states. It is therefore advisable to be in a position where the law of the seat, i.e. the place that an award will be deemed to have been made is in a state contracted to the New York Convention, and that the award will be enforced, if in a different jurisdiction, in a contracting state.

Other relevant factors to consider when agreeing to arbitrate include the costs and speed of arbitration when compared to the courts that would otherwise have had jurisdiction over the disputes. The courts in some jurisdictions are more reliable and efficient than in others. The efficiency of a legal system is also relevant when considering the seat of the arbitration, as this will determine the jurisdiction for any interim remedies or other support required during the proceedings. Some jurisdictions are more supportive of arbitration than others and it is worth investigating local jurisprudence with regards to the particular circumstances.

To arbitrate or not to arbitrate?

The variety of choices and options available mean that parties can agree to those arbitral proceedings that, as best as possible, will suit the disputes they anticipate. However, it is important to be alert to the impact that the different laws and jurisdictions involved might have on the arbitral proceedings and any awards – notably, at the time of negotiating and agreeing an arbitration agreement, when commencing arbitration and throughout the process.

If you have any questions about the points raised in this article, please contact Gordon Bell, Mike Stewart or Mary Lindsay. For more insight into key construction topics in relation to English law, look out for more updates from our ‘Back to Basics’ series of articles for non-English qualified in-house lawyers, contract managers and construction professionals.

Footnotes

[] Arbitration Act 1996.
[] International Chamber of Commerce.
[] Singapore International Arbitration Centre.
[] Hong Kong International Arbitration Centre.
[] London Court of International Arbitration.
[] China International Economic and Trade Arbitration Commission.
[] The UNCITRAL Rules are the arbitral rules of the UN Commission on International Trade Law.
[] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958).