Arbitration clauses were typically copy paste clauses – appearing somewhere in the miscellaneous provisions which are included in contracts without much thought.

Times have changed. Arbitration is assuming greater importance in everyday contracts and is no longer the luxury of MNCs and enormous public sector undertakings.

The objective of this post is to provide a few pointers for drafting an effective arbitration clause given the present Indian legal context.

The principal question to be asked by the contract draftsman is whether or not arbitration is the preferred mode of dispute resolution (versus of course, litigation). Is arbitration at all permitted in respect of such contracts? This is given that there are some disputes that are inherently non-arbitrable.

The draftsman should also consider whether or not his client is the one more likely to invoke arbitration. This will determine the nature of cool-off clauses and complexity of the arbitration procedure laid out in the arbitration clause.

It is also important to know your parties and intelligently determine jurisdiction of the arbitration. What is the domicile of the parties, specifics of the laws of their domicile etc need to be considered while determining the "seat" of arbirtation or the law of the arbitration agreement. Is this going to be the same or different as compared to the law of the contract?

Depending on the jurisdiction chosen and whether or not the arbitration is an institutional or ad-hoc arbitration, the following may be specified in the arbitration clause:

  1. Number of arbitrators
  2. Language of arbitration
  3. Whether costs to be awarded
  4. Pre-arbitration procedure
  5. Any exclusions (such as valuation or pure technical questions)
  6. Exclusion of any specific procedural aspects of evidence etc of any specific jurisdiction

One needs to be careful while introducing excessive limitations such as qualifications of arbitrators. This is not advisable unless the arbitration is based on a specific law such as maritime law or is of a hyper technical nature.

Given the current Indian scenario, it may not be relevant to introduce time frames in the arbitration clause for proceedings and filings.

In case of multiple contracts it would be important to assess arbitration clauses across each of those contracts, the parties to such arbitration disputes and determine the manner of proceeding under each transactional document. To avoid any disputes on how to conduct multiple proceedings under various contract, parties should unequivocally set out whether or not the proceedings are intended to be clubbed.

We recommend that the arbitration clause be carefully crafted for each situation / contract with a view to minimising dispute procedures and effectively resolving the dispute at hand. One should also be mindful of costs of the process of arbitral dispute resolution.

In all, adopting a simplistic attitude in drafting the clause, so as to provide maximum flexibility is the key – as no one can envision the future and the nature of the dispute that may arise several years down the line.

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.