What is an Arbitration Agreement ? (With Sample Templates)

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Date published: 29 Jan 2021
by DocPro Legal
Last Update: 5 Feb 2021

An Arbitration Agreement is typically a clause within a contract, whereby parties agree to settle the dispute outside of courts (through Arbitration!).

 

Before going into the details about the process of Arbitration, let us look at the features of Arbitration:

 

What are the advantages of Arbitration?

  • The finality of award / Time saving

    All awards are final. It gives certainty to parties to decide on what to do next. If the parties choose to settle the dispute in local courts, they may have to wait for years as there is a right to appeal in the traditional court system.

     

  • Saves cost

    Costs of Arbitration are generally lower than litigation.

     

  • Third-party funding in Arbitration 

    Parties who have a legitimate claim but cannot afford the costs to file a claim can look for third parties to fund their expenses. In return, the funding party may ask for a percentage of the relief granted. Some jurisdiction strictly prohibits the use of third-party funding, but it's not such an alien concept, as many countries accept it.

     

  • Privacy 

    Parties can choose to hold their hearing in private and not publicize their awards. This allows parties to protect their business secrets. It is essential to sectors such as Intellectual Property.

     

  • Flexibility 

    Parties can choose their arbitrator to resolve the dispute. Often these are experts that are incredibly knowledgeable in a field, such as niche areas like construction. They can also decide on the language, venue of the hearing, nationalities of the arbitrators, Arbitration rules, schedule and more.

What are the disadvantages of Arbitration?

  • Decisions can be unpredictable.

    The court follows a system of precedence. The previous court's findings bind lower courts. In Arbitration, the arbitrator conducts their assessment, and any other decisions do not bind them. 

  • Selected arbitrators are not knowledgeable about the law.

    Sometimes when experts are chosen to be the arbitrators, they have a lot of technical knowledge. Still, they may lack the expertise of the law selected by the parties. When only one arbitrator is selected, they may not have sufficient experience to conduct a charitable legal analysis of the dispute in hand.

  • Certain reliefs or remedies are not available.

    Arbitrators are more restricted than judges. Although the rules may differ in each jurisdiction, generally, arbitrators cannot grant a subpoena, imprisonment, or injunctions. These remedies can be essential, where certain events occur (e.g. political arrest) and require imminent actions and the consequences of not obtaining such an order are irrevocable.

Overview: What is the process of Arbitration?

  1. Forming an arbitration agreement

    This is usually included as part of their contract.

  2. The dispute arises

     Conflicts between the two parties, e.g. there is a breach of contract

  3. Initiating Arbitration Proceedings

    Sending written notification to another party to begin the process.

  4. Formation of the panel

    Selecting arbitrators that will hear the case.

  5. The Hearing

    The selected arbitrators will review the claims from both sides.

  6. Panel issues an award

    The arbitrators will decide on the issue, e.g. remedies will be granted, or the case dismissed.

STEP 1: Forming an arbitration agreement

 

What are the essential elements of an arbitration agreement?

 

The seat of Arbitration – This is the 'legal home' of the Arbitration. It determines which are the default procedural laws that would apply to the arbitration agreement. Essentially, it determines which courts have the jurisdiction to grant interim relief, right to appeal, support and supervise the Arbitration. The legal effect of the award will be affected as well for enforcement. 

 

The seat of Arbitration is not necessarily the venue of Arbitration. Usually, the seat and venue of Arbitration will be the same. However, Arbitration can be held virtually anywhere. As there are many hurdles to travelling right now, many parties are now running their arbitration hearings remotely.

 

Law Governing the arbitration agreement - These are the rules that apply to the arbitration agreement. Usually, the seat of Arbitration will provide for some default rules for procedural orders.

For example, if parties decided England to be their Arbitration seat, the default arbitration rules that would apply is the Arbitration Act 1996. Additionally, parties can also choose to use procedural rules provided by institutions as they wish:

    • The London Court of International Arbitration (LCIA)
    • Arbitration Institute of the Stockholm Chamber of Commerce (SCC)
    • Hong Kong International Arbitration Centre (HKIAC)

They cannot, however, opt-out of mandatory provisions provided by the seat of Arbitration.

 

  • Sample Clause: "Any dispute arising out of or in connection with this contract shall be referred to and finally resolved by arbitration under the LCIA Rules."

 

Alternatively, there are associations with specialized procedural rules for certain industries:

 

  • Sample Clause: "This Charter Party shall be governed by and construed in accordance with English Law and any dispute arising out of or in connection with the Charter Party shall be referred to Arbitration in London in accordance with the Arbitration Act 1996 or any statutory modification or re-enactment. The Arbitration shall be conducted in accordance with the London Maritime Arbitrators Association Terms 2012."

 

Condition precedents to Arbitration 

Some arbitration clauses will attach conditions that parties would have to fulfil before pursuing Arbitration, requiring parties to attempt to resolve the dispute amicably through negotiation, mediation, and conciliation. After a stated amount of time has passed, then parties can initiate the proceedings for Arbitration. It is s procedure as Arbitration or litigation are often final means of resolving a dispute.

 

For example, the International Centre for Settlement of Investment Disputes ('ICSID') provides that:

 

  • "Consent of the parties to Arbitration under this convention shall, unless otherwise stated, deemed consent to such arbitration to the exclusion of any other remedy. A contracting state may require the exhaustion of local administrative or judicial remedies as a condition of its consent to Arbitration under this convention."

 

 

What types of contracts should use arbitration? Here are some examples:

 

Commercial contracts 

Parties with different nationalities or cross-border transactions would use Arbitration to deal with breaches of contracts, shipment problems, and sales of goods. In the commercial context, parties prefer to use Arbitration as it can be difficult to enforce foreign judgments. As of August 2020, 166 countries are party to the New York Convention, which means that parties may enforce a valid award in those countries.

    • Banking / Finance 

      Parties in this sector often have disagreements over results produced by financial models and formulae calculations. Parties usually select arbitrators with a high understanding of the financial products and financial markets to adjudicate on their dispute.

    • Construction and Energy

      One of the top reasons for selecting international Arbitration over litigation is to avoid national courts and local political pressure. Construction and energy projects are often highly controversial as the impact of their projects on the local community can be immense. Parties in these sectors usually prefer private hearings.

    • Shipping / Maritime 

      Most of these cases involve problems of contractual interpretation. Especially in the case of shipping, it is essential to be efficient. Many arbitrations in this field are "documents-only". If the jurisdiction allows it, these parties can resolve the issue in Arbitration without any oral hearing. This makes the process much as shipping transactions are often operating in multiple jurisdictions at once. It is also useful to obtain an award without having to worry about its enforceability in other states. 

    • Technology, Media, and Telecom ('TMT')

      IP, Licensing, Data / System breaches due to human errors are common reasons for disputes in this sector. These disputes may be highly technical and complex. Confidentiality is essential as customers of IT suppliers have access to their business strategies and procedures. It is the interest of these customers to keep their information confidential and private, away from the public as much as possible. 

International Investment Treaties 

In these treaties, each state promises to protect foreign investors. Failing to provide these protections (e.g., Fair and equitable treatment, any explicit promises or reassurances) may give an investor a right to sue the host state in investment arbitration. For example, a government may have promised to grant a foreign investor a license before making their investments in that country. The government then issues a new regulation that strips away the permit. The company may be left with properties without any practical usage. A company may then sue the government for taking away their license. 

 

Employment contracts

It is usually not in the company's interest to publicize disputes. Company policies and management are sensitive topics. These issues can seriously damage the company's reputation. 

 

Professional Athlete contracts 

As awards of Arbitration are final. Many sports committees usually resolve their issues through Arbitration. Some of the common disputes include disqualifications (e.g., doping); any disciplinary actions. The process of awaiting the appeal decision may be too long. The athletes may not be in their best condition to compete anymore. Moreover, salary disputes are extremely sensitive, and a public trial could damage a sports team's reputation.

 

STEP 2: Dispute arises

The dispute has arisen. Parties may try to negotiate or communicate with each other to settle before initiating the arbitration process.

 

STEP 3: Initiating the arbitration process

Attempts to negotiate for a settlement did not yield fruitful results. A party now writes a letter to the other party to request for Arbitration to settle the matter. The other party writes back and agrees to go to Arbitration.

 

STEP 4: Formation of the arbitral tribunal

 

How are arbitrators chosen?

Now, how is the arbitration panel formed? Here are the common methods of selecting arbitrators:

 

  • The arbitration agreement

    The agreement may specify a method of selection or a panel of arbitrators. The problem with naming specific arbitrator(s) in an agreement is there is no guarantee that these arbitrators would be available to hear the case.

  • Institution

    Arbitration centres have its procedures on selecting arbitrators. Usually, the policy will provide that if the parties cannot mutually agree on the panel members, the institution will appoint the arbitrators.

  • List System

    Each party prepares a list of arbitrators, briefly describing their experiences and expertise. They exchange the list and eliminate arbitrators that they object to and rank each remaining arbitrator's order of preference. The list is then handed to an appointing authority to review the order of choices and decide on the panel's final composition.

  • Co-arbitrators decide on the presiding arbitrator.

    When the arbitration agreement requires three arbitrators, each party will usually appoint one arbitrator. The two appointed arbitrators will then select the presiding arbitrator. Usually, there are procedures to consult with the parties to ensure that the appointed arbitrator is acceptable to all parties.

  • Court-appointed

    The default rules of the seat of Arbitration can provide for procedures for such appointment. Usually, the court will only act if parties cannot agree. It is usually not the parties' interests for courts to appoint arbitrators as the defeats the point of going to Arbitration in the first place.

STEP 5: The hearing

If the party agrees to Arbitration unconditionally and, parties will go to the hearing in normal circumstances. Most of the time, one party objects to the arbitral tribunal's jurisdiction and takes the matter to the supervising court (seat of Arbitration) or raises a jurisdictional defence or the arbitral tribunal will first determine whether they have the legal basis to hear the case.

 

STEP 6: Getting the award

After the hearing, arbitrators will render an award. Typically, the panel will render an award within 60 days. Here are the possible outcomes of an arbitration hearing:

 

Remedies granted 

If the award favours the complainant, the respondent likely has to pay for damages and Arbitration costsDepending on the legal claim, sometimes the arbitrator can order specific performance, compelling a party to do an action instead of paying a sum of money.

 

Case dismissed 

The arbitral tribunal ruled in favour of the respondent. The complaining party may have to pay for all of the expenses of Arbitration.

 

Parties may then enforce the award to compel the party to act. Courts may assist in the recognition and enforcement of the award.

 

Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.

 

 

 

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