Why Do You Need An Arbitration Clause In A Contract?
Any commercial party entering into an international contract, particularly where that contract relates to investment or property located in a foreign jurisdiction whose laws and legal processes are unfamiliar, will want to be sure that the contract contains a robust and effective mechanism for resolving any future disputes which may arise.
What Is Arbitration?
In England, arbitration is governed by the Arbitration Act 1996. Arbitration is similar to litigation in that it involves the parties referring a dispute to an independent third party who reaches a decision regarding the dispute which is binding on all the parties. However, arbitration is generally less formal and more procedurally flexible than litigation. Arbitrators’ awards are also more readily enforceable across international boundaries than court judgments.
What Are The Key Advantages Of Arbitration?
Flexibility and privacy
Arbitration clauses provide flexibility as the dispute process can be tailored to the parties’ specific requirements. This can be an advantage where the parties to the contract are based in different jurisdictions. The parties have the freedom to select the rules that they want to apply to the arbitration, for example the rules of the London International Court of Arbitration ("LCIA Rules") or the rules of the Paris based International Chamber of Commerce ("ICC"). The parties can also choose how the arbitrator is selected, in order to ensure that an arbitrator with appropriate experience presides over the arbitration.
Arbitration is also a private means of resolving disputes, in contrast to public court proceedings. This is often a great advantage over litigation, particularly where the parties want to keep the subject matter and arbitral award confidential.
Enforcing arbitral awards
Many countries are signatories to the New York Convention on the Recognition and Enforcement of Arbitral Awards 1958 which makes enforcement of arbitral awards in overseas jurisdictions fairly straightforward. In contrast, enforcing court judgments overseas can be more difficult. It is obviously important to obtain a final award which will be enforceable in the overseas jurisdiction in which any assets are located.
What are the main choices of law for the parties entering into an arbitration agreement to consider?
There are two main areas of law for the parties to consider:
- the law that will govern the actual contract between the parties in which the arbitration clause is contained; and
- the place with which the international arbitration will be connected (often called "the seat" of the arbitration) and whose laws will determine the procedures of the arbitration where any other rules that the parties may select to govern the procedures of the arbitration are silent (for example, the LCIA Rules or the ICC Rules as mentioned above). The parties will usually want to choose a ʺseatʺ in which local laws will support the arbitration process and where the courts will strive to uphold the arbitration agreement.
Why is England a good "seat" for arbitration?
England is good seat as the English courts will often grant a special type of injunction (known as an "anti-suit injunction") to restrain a party from commencing court proceedings in an overseas jurisdiction where the court proceedings would be in breach of an agreement to arbitrate in England.
There has also been recent English case law in which the courts have shown a willingness to interpret arbitration clauses widely. This helps avoid expensive preliminary arguments regarding the scope and validity of the arbitration clause.
Other Factors To Consider In The Context Of International Arbitration Agreements
Language of the arbitration?
This should be agreed by the parties and specified in the arbitration agreement to avoid any disagreements at a future date.
Institutional or "ad hoc" rules?
Legal advice should be taken to ensure that an appropriate set of rules are chosen in each case. The main choice is between:
- Institutional rules (e.g. the LCIA Rules or the ICC Rules) which are where an institution acts as the administrator of the arbitration process. A commercial party entering into an arbitration agreement with a less sophisticated party based in an overseas jurisdiction may prefer institutionally administered rules to ensure that the arbitration process is dealt with quickly and smoothly.
- Ad hoc rules (for example the UNCITRAL Rules) which allow the parties more freedom to arrange the arbitration themselves without any institutional support. This is cheaper than institutional arbitration but can be slower and frustrating for a party bringing a claim against an overseas defendant who is unfamiliar with arbitration processes.
There may also be the possibility of ICSID arbitration of investment related disputes to consider, depending on the nature of the dispute and where the parties and the investment are located.
What About The Local Laws Of The Relevant Foreign Jurisdiction?
Even where England is chosen as the seat of the arbitration, it is still important to consider any relevant local laws applicable in the jurisdictions where the parties and the property that is the subject matter of the agreement are located. Some country specific examples of points to consider are below.
Ukraine: It is important to seek advice to establish that the contract has the necessary "international" element under Ukrainian law to allow the parties to opt for a "foreign" choice of law and arbitration outside Ukraine, otherwise in some cases the Ukrainian courts may decide to apply Ukrainian law instead.
Serbia: The laws of some jurisdictions will limit the type of matters that can be referred to international arbitration. For example, in Serbia disputes involving rights in relation to real property or arising out of real estate lease agreements are generally subject to the exclusive jurisdiction of the Serbian courts.
Poland: In Poland, if a party wants to object to proceedings being commenced in the Polish courts on the basis that the parties had agreed to submit their disputes to arbitration, the objection must be raised in a "timely manner," or else the Polish courts will press ahead with hearing the claim even if the parties had agreed to arbitrate elsewhere.
Conclusion
When entering into any international contract containing an agreement to submit future disputes to arbitration, it is important for parties to take specific legal advice as to the drafting and enforceability of a suitable arbitration clause in every case, in order to make the best use of the range of options available. This is particularly relevant in the case of emerging overseas markets whose courts and procedural rules may not lend quite as much support to the arbitration process as those in England.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
