Drafting an arbitration clause or drafting a complete arbitration agreement is similar to drafting any other agreement i.e., it involves review and analysis of all different facts and permutation and combination to achieve the object of the parties.
A sample arbitration clause may not be sufficient or effective to capture the intentions of the parties. These are some essential points, discussed below, which shall be taken into consideration by every person desirous of drafting an unambiguous arbitration clause which would come back to haunt them at the time of the dispute.
As a first step in the appointment process, the parties should refer to the contract, treaty or law containing the consent to appoint arbitrator(s). This instrument may set forth a prior agreement between the parties on the number of arbitrators and/or the method of their appointment. However, absence of a prior agreement will require the parties to agree on the number of arbitrators and the method of their appointment will require the parties to be back to the law for arbitration chosen. For eg: Under Indian laws, where the agreement is silent, arbitration will be referred to a sole arbitrator to be mutually appointed by the Parties. Arbitration and Conciliation Act (“Act”) provides a procedure and timeline to assist the parties in reaching an agreement. Parties may agree opt for the appointment of one or three arbitrators depending on the purse strings of such parties. However, it is important for parties to specifically provide the particulars of arbitral tribunal in the arbitration agreement to avoid future contention. If arbitration agreement does not provide the number of arbitrator and the parties do not agree upon the number or procedure of appointment of arbitrator, the parties shall be required follow the default mechanism as specified in the Act.
Seat of Arbitration
Another important point while drafting an arbitration agreement is to mention unequivocally the seat of arbitration. Please note that “seat” of arbitration is not the same as “venue” where arbitration is being conducted. An arbitration seated in Singapore may be conducted anywhere if the Parties agree or even through video conferencing.
In the 2017 decision of Indus Mobile Distribution Private Ltd v. Datawind Innovations Private & Ors (‘Indus Mobile’ judgment) the Supreme Court moved the international concept of ‘seat’ of arbitration in the context of domestic arbitrations as well. The Supreme Court ruled that if the arbitration clause confers exclusive jurisdiction upon the Courts of a particular city/state it is tantamount to designating that place as the ‘seat’ of arbitration and Courts of only that city/state will have the supervisor power over the conduct of the arbitration proceedings and provide relief.
If the arbitration agreement mentions the ‘place’ of arbitration, that in itself is not sufficient to consider it equivalent to the seat of arbitration. The presence of any contrary evidence would lead to the place not being the same as the seat of arbitration.
This question was revisited by the three-bench judge bench of SC in BGS SGS SOMA JV v NHPC Ltd., (‘BGS’). In BGS, the Court further developed the Roger Shashuatest and held that ‘venue’ of arbitration can also be the seat of arbitration if :
- The seat of arbitration has not been designated in the arbitration agreement, and;
- There is an express designation of ‘venue’ in the arbitration agreement combined with a supranational body of rules governing arbitration, and;
- There are no significant contrary indicia.
The intention of the parties with respect to choosing a place as the seat of arbitration is to be gathered from the language of the arbitration agreement.
Hence, for a person drafting an arbitration agreement, we would recommend mentioning that the “seat” of arbitration is X but parties may choose any Y place to be the venue or conduct hearings through video conference (as was done in the pandemic). The seat so chosen must be favourable to the party for whom such clause is being drafted.
Rules of arbitration
It is also imperative to have a quick-think on whether any particular institution is to be chosen for the arbitration – like ICC or LCIA. This may also have an impact on seat to be chosen. Depending on the nature of dispute sometimes these institutions may have expedited procedures. The expedited procedure may not be favourable for the party for whom the arbitration clause is being drafted. All of these points need to be considered.
While drafting care must be taken in accepting any cool-off periods or mandatory mediation prior to commencing arbitration. Certain aspects such as intellectual property rights, protection of certain remedies could be affected by such prolonged pre-arbitration processes. Please see our previous post on the subject outlining in detail the law therefor.
Exclusions – Expert Determination
Arbitration may not be the right forum for resolving certain disputes quintessential to the execution of the contract. For eg: valuation of shares or price determination. In those circumstances it is imperative to exclude from arbitration the determination of issues critical to execution of the contract so that the contract is not left open ended and live through an entire arbitration and the resultant challenges of awards in courts of law. In many contracts especially EPC, an expert is appointed to determine and decide day to day issues. Most IT contracts have reference to a committee of senior management that would take all operational decisions.
The essential points while drafting an arbitration agreement or arbitration clause are firstly, determine a coherent procedure to appoint arbitrator, secondly the seat of arbitration shall be explicitly stated to avoid conflicting interpretation with respect to the seat of arbitration and thirdly the parties shall endeavor to amicably settle the dispute through mediation, which could resolve the dispute economically, successfully and expeditiously.