Australia: Drafting an effective international arbitration agreement – tricks and traps

Last Updated: 29 July 2016
Article by Toby Boys and Lucy Munt

Introduction

Arbitration is an effective process to resolve disputes that arise in international transactions. If properly managed, arbitration is a time and cost efficient method of dispute resolution that culminates in a binding and internationally enforceable decision. But unlike national courts which exercise the coercive power the state, an arbitral tribunal derives its power from the consent of the parties as found in the arbitration agreement. Therefore, the success of an arbitration, and by extension the protection of parties' legal interests, rests largely upon the wording of the arbitration agreement.

Many arbitration bodies provide excellent model clauses or example arbitration agreements. But they are not well suited to every transaction and every type of dispute. This article will provide an overview of international arbitration before discussing some of the most important 'tricks and traps' parties and their lawyers need to be aware of when negotiating an arbitration agreement.

The benefits of international arbitration

There are many and varied benefits to arbitration as opposed to litigation in a court. Depending upon the transaction and the parties involved, it is likely that some benefits will be perceived as more important than others. It is critical that those benefits most important to the parties are borne in mind when negotiating the arbitration agreement. After all, a poorly drafted or poorly thought out arbitration agreement can undermine the perceived advantages of arbitration.

Expertise of arbitrators

Unlike in court litigation, where disputes are heard by a judge who is allocated to the case, arbitration permits the parties to nominate the arbitrators to determine the dispute. So, while some disputes might be well suited to resolution by a legal expert, others might be highly technical or require divergent expert evidence concerning questions best left (for example) to engineers, quantity surveyors, or builders. In those circumstances, the ability to match the skills of the decision maker to the issues in dispute is an obvious advantage.

Flexibility of proceedings

Arbitration offers greater procedural flexibility than litigation. Litigators are bound by those rules of court and evidence in the jurisdiction in which a matter is heard. Strict, mandatory rules can be beneficial in some circumstances, but they are also costly and can hinder progress of the dispute. Arbitration rules often permit parties to agree on time limits; confidentiality; location of oral hearings; the language of documents and hearings; and even whether the tribunal will make a decision according to law or according to justice and fairness.

Neutrality and avoidance of national courts

As a method of dispute resolution divorced from local courts, arbitration offers parties a neutral forum and access to demonstrably neutral decision makers. Because of the supervisory role played by the courts of the seat of arbitration,1 parties often prefer to have their arbitration determined in a neutral jurisdiction. Parties have the opportunity to arbitrate according to neutral rules and procedures, disconnected from domestic jurisdictions.

Limited recourse against the award

Once an award is made, it is usually only able to set aside on limited grounds such as jurisdictional error by the tribunal or breach of public policy. This is contrasted with the wide grounds on which a decision of a first instance judge may be appealed.2

Ease of enforcement of arbitration agreement and award

By virtue of the New York Convention on the Recognition and Enforcement of Arbitral Awards

(the New York Convention), awards are easily enforceable in a variety of jurisdictions around the world. The New York Convention has been signed by more than 155 nations worldwide.3 As its name suggests, it regulates the international enforcement and recognition of foreign awards. At its simplest, it compels state parties' courts to recognise and enforce international arbitral awards unless the relevant arbitration agreement, the tribunal, the proceedings, or the award do not satisfy the limited requirements set out in the New York Convention.

Australian courts are considered 'pro-arbitration' and readily uphold agreements to arbitrate, even in the face of significant ambiguity or 'pathology'.4 They have also enforced awards in the face of allegations that the tribunal had no evidence to support its decision, or proceeded without adequate notice to a respondent,5 or failed to accord a party natural justice6 or procedural fairness.7

International enforcement of a judgment, however, is much more difficult. In order for a judgment to be enforced internationally, there must be a mutual recognition agreement between the jurisdiction in which the decision was made and the jurisdiction in which enforcement is sought. By way of example, at the time of writing this article, Australia has agreements with fewer than 30 countries.8 Notably absent are the United States, China, and Thailand, all in Australia's list of top two-way trading partners.

Drafting an arbitration agreement: the basics

It is with these advantages in mind that we consider drafting the arbitration agreement. An 'arbitration agreement' may be a stand-alone agreement or an arbitration clause within a commercial agreement between the parties. Arbitral institutions usually provide model clauses. These are example arbitration agreements that parties intending to arbitrate in accordance with the institution's rules can incorporate into their contract.

While such model clauses are obviously useful to those wishing to have an institutional arbitration, the clauses are also valuable to parties who are not; they are tried and tested clauses shown to work repeatedly in practice. Whether you are adopting an institutional clause or drafting your own clause, we have outlined some factors below to bear in mind.

The Model Law and the New York Convention

An arbitration agreement must satisfy the requirements of the lex arbitri (the law of the place of arbitration) and the law of the place of enforcement. These will likely be the Model Law9 and the New York Convention. They require an agreement in writing to submit any or all disputes to arbitration, whether existing or future, arising in the context of a defined legal relationship (whether contractual or not) and capable of arbitration.

- 'In writing' requirement

An arbitration agreement must be evidenced in writing. 'Writing' has a broad definition; however, the requirement is satisfied by inclusion of an arbitration clause in an agreement that has been signed by the parties. It can also include an electronic document.

- 'Any or all disputes'

Parties have the discretion to refer all or only particular matters or types of disputes to arbitration.

To be safe, arbitration agreements should be couched in mandatory language, not merely directory. They should use words to the effect that 'disputes shall be referred to arbitration'.

While 'may be referred to arbitration' has been held to be valid, the use of non-mandatory language is an unnecessary risk that can undermine the parties' ability to refer a matter to arbitration in accordance with the arbitration agreement.10

- Defined legal relationship

The arbitration agreement must define the subject matter of disputes that will be referred to arbitration. This requirement is usually satisfied by inclusion of words in the agreement, such as, that disputes 'arising out of or in connection with this agreement' will be arbitrated.11

But attempts to cast the net too wide, and have the clause apply to any dispute between the parties whether arising out of the commercial relationship or not, may fall foul of the requirements of the Model Law and New York Convention.12

- Capable of being arbitrated

'Arbitrability' refers to whether a dispute is capable of being resolved by arbitration. National laws may deem certain matters incapable of arbitration. For example, family law matters are usually only capable of being resolved through the public court system. Often laws aimed at protecting consumers are also considered to fall outside the jurisdiction of an arbitral tribunal.

Institutional or ad hoc

As set out above, an arbitration administered by an institution, and in accordance with institutional rules, is 'institutional'. If it is not institutional, the arbitration is 'ad hoc'.

Institutions are non-government bodies with a supervisory function, specialised in administering the logistical and practical aspects of arbitrations. They have a secretariat or court that decides matters that would otherwise fall to be determined by the domestic courts such as the appointment and challenge of arbitrators.

There are many different arbitral institutions around the world. Some of the most well known institutions in the Asia-Pacific region include the Hong Kong International Arbitration Centre (HKIAC), the China International Economic and Trade Arbitration Centre (CIETAC) and the Singapore International Arbitration Centre (SIAC). In Australia, the Australian Centre for International Commercial Arbitration (ACICA) and the Resolution Institute (formerly named IAMA) will administer arbitrations.

Institutional rules have generally been shown to work well in practice. The rules are periodically revised and updated to keep pace with developments in law and practice. Parties who agree to arbitrate according to institutional rules automatically incorporate those rules into their agreement.

Ad hoc arbitrations are administered by the tribunal itself. They can be conducted in accordance with institutional rules (usually the UNCITRAL Rules) or rules developed by the parties. As such, ad hoc arbitration typically requires a high degree of cooperation between the parties. Parties are also reliant on national arbitration legislation and are subject to the supervisory jurisdiction of the courts for a wider variety of matters.

Selection of rules – matters to consider

Arbitral rules regulate procedural aspects of the arbitration such as the method and timing of filing documents; the conduct of the evidentiary hearing; and any application for provisional measures. It is important to be aware of differences between institutional rules.

For example time limits can vary substantially13 and tribunals may wield different powers.14 The speed at which an award must be issued, or at least drafted, can range from 45 days from the close of proceedings15 to six months from the formation of the Tribunal.16

Drafting the arbitration agreement: details

The parties have broad discretion to make decisions about the conduct of their arbitration, but where the parties fail to make those decisions, the tribunal will fill in the gaps.

Number of arbitrators

If parties prefer to stipulate the number of arbitrators in their arbitration agreement, it is advisable to agree on one or three. Odd numbers prevent a deadlock and more than three arbitrators can be prohibitively expensive.

Three arbitrators, while obviously increasing the costs of the arbitration, allow the parties to select at least one arbitrator who shares the characteristics or qualification that party desires. They may dispose of the work more quickly and, in large and complex cases, may be capable of producing a better final award.

A sole arbitrator may be lacking in either the legal or technical expertise to properly grasp the significance and intricacies of all aspects of the dispute, though if parties have careful selection procedures in place this can be avoided. But sole arbitrators are significantly cheaper. It is also obviously more difficult to coordinate the schedules of three people as opposed to just one.

Most rules provide that the head of the institution selects the arbitrators where the parties cannot agree on the number or identity of the arbitrators. In the case of ad hoc arbitration, the courts, or another authority, can provide assistance to determine the identity of the arbitrator.17

Language of the arbitration

Parties are able to select the language of the arbitration proceedings, including the language of submissions and the final award. The language is usually dictated by the language of the parties involved. However, the language of possible witnesses and the official language of potential places of enforcement are also relevant factors.

Law of the merits

This is the law that is to be applied to determine the merits of the dispute. Most arbitration rules provide that, absent a selection by the parties, the law will be selected by the arbitral tribunal.18 But, it is preferable that law be agreed in advance so the parties understand the content of their obligations from the commencement of the contract.

Law of the arbitration agreement

An arbitration agreement is a distinct and separate agreement from the main contract. This ensures that, following termination of the substantive contract, disputes arising out of that termination can still be referred to and determined by arbitration. As a result, the arbitration agreement can be governed by a law that is different from the law that governs the merits of the dispute.

The law of the arbitration agreement governs the interpretation, formation and enforcement of the arbitration agreement as a separate contract. So, if the law of the arbitration agreement is Australian law, then Australian contractual principles will govern the arbitration agreement.

Often, parties fail to make this selection. This can cause problems when a dispute arises, particularly in complex cases that may involve multiple parties or contracts, or non-signatories. If parties turn their minds to this question when drafting an arbitration agreement it can avoid unnecessary costs and delays.

In circumstances where the parties have failed to select the law of the arbitration agreement, the tribunal will choose for them. This instantly creates uncertainty: some jurisdictions consider that, absent a selection by the parties, the law of the seat of the arbitration will govern the arbitration agreement.19 Others apply the law of the substantive contract. This unnecessarily delays the tribunal proceeding and increases costs, creating an additional question for the tribunal to answer.

The seat or place of the arbitration

Seat selection is a critical aspect of the arbitration agreement. The seat of arbitration determines the lex arbitri or law of the arbitration. It is the law that determines the validity and enforcement of the arbitration agreement. It also determines which courts will hear applications to challenge the tribunal20 or set aside an award.

It is best to select a neutral seat with local courts known for being supportive of the arbitral process. It is also important to be familiar with the arbitral law of the seat of arbitration to ensure that challenges can be mounted with speed and enforcement proceedings won't be disrupted by technicalities.

Final advice: things to avoid

Avoid including too much detail in your arbitration agreement. Trying to define the parameters of the arbitration agreement too precisely can invalidate the arbitration agreement or oust the tribunal's jurisdiction in respect to certain matters.

Parties should also bear in mind that if a contract is ongoing or is part of a group of contracts, it may be necessary to consider ways to ensure speedy resolution of disputes. Some institutions provide fast track arbitration rules that usually facilitate resolution of disputes within a three month period (while information is not readily available,21 some sources indicate the average length of an arbitration is between 16 and 20 months).22 However, this should be balanced against the likely size of any potential dispute.

Footnote

1 A concept discussed later in this article.

2 Note: the limited recourse against the award is widely seen as one of the few remaining efficiencies exclusive to arbitration.

3 As at the date of writing.

4 Robotunits Pty Ltd v Mennel [2015] VSC 268.

5 Emerald Grain Australia Pty Ltd v Agrocorp International Pte Ltd [2014] FCA 414.

6 Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd [2015] NSWSC 735.

7 Ye v Zeng [2015] FCA 1192.

8 Foreign Judgments Regulations 1992 (Cth).

9 Note: some jurisdictions, like the United Kingdom, have not adopted the Model Law. Usually the arbitration legislation in these jurisdictions defines 'arbitration agreement' in the same way as that set out in the Model Law.

10 Anzen Ltd & Ors v Hermes One Ltd (British Virgin Islands) [2016] UKPC 1; WSG Nimbus Pte Ltd v Board of Control for Cricket in Sri Lanka [2002] 3 SLR 603; Oakton Services Pty Ltd v Tenix Solutions IMES Pty Ltd [2010] VSC 176.

11 Comandate Marine Corp v Pan Australia Shipping Pty Ltd [2006] FCAFC 192; Walter Rau Neusser Oel und Fett AG v Cross Pacific Trading Ltd [2005] FCA 1102; cf Fiona Trust & Holding Corporation v Privalov [2007] Bus L R 686.

12 This is rarely tested, though parties should be take note of Roose Industries Ltd v Ready Mixed Concrete Ltd [1974] 2 NZLR 246.

13 Compare SIAC Rules, Art 4 (under which a response to a Notice of Arbitration is due within 14 days of receiving the notice) and CEITAC Rules, Art 15 (under which a defence must be filed within 45 days of receipt of the Notice of Arbitration).

14 See HKIAC Rules, Art 28 (under which a tribunal can consolidate two or more related HKIAC arbitrations). The SIAC Rules contain no similar provision.

15 For example, the SIAC Rules require a draft award to be provided to the Registrar within 45 days from the date on which arbitral proceedings are closed.

16 CEITAC Rules, Art 48.

17 International Arbitration Act 1974 (Cth), s 18.

18 cf HKIAC Rules, Art 35; SIAC Rules, Art 27; ACICA Rules, Art 34.

19 Sulamerica Cia Nacional de Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638. It is worth noting that, since the decision in Sulamerica, institutions have updated their model arbitration clauses to either prompt parties to select the law governing the arbitration agreement (like the HKIAC) or changed their arbitration rules to include a provision stating that the law governing the arbitration is the law of the seat, unless otherwise agreed (LCIA Rules, Art 16.4).

20 Subject to the provision of relevant institutional rules.

21 Queen Mary University of London and White and Case LLP, 2015 International Arbitration Survey: Improvements and Innovations in International Arbitration (nd), available online at <http://www.arbitration.qmul.ac.uk/docs/164761.pdf>.

22 London Court of International Arbitration, LCIA Releases Costs and Duration Data (3 November 2015), available online at <http://www.lcia.org/News/lcia-releases-costs-and-duration-data.aspx>.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

Authors
Toby Boys
 
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