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What is an Arbitration Agreement ? (With Sample Templates)

Pooja Batra
Last Updated:

8 Aug 2022

Published On:

29 Jan 2021

min read

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An arbitration agreement is a clause in a contract where parties to the contract agree to settle the dispute in question outside of the court system through arbitration. Arbitration is an alternative to litigation for solving disputes where parties agree to assign an independent third party to resolve the dispute between them. Before we go into the details of arbitration, let us first look at the features of arbitration and why it is an advantage to litigation or other means of dispute resolution. If you want to learn more about how arbitration compares to mediation, feel free to read our dedicated blog post here.

 

 

What are the advantages of Arbitration? 

 

Saves time 

 

All awards under arbitration are final. This provides a sense of certainty to parties, making it easier for them to decide on how to proceed. In contrast, if 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 lower than that of litigation.

 

 

Third-party funding in Arbitration 

 

Through arbitration, parties who have a legitimate claim but cannot afford the cost of filing a claim can look for third parties to fund their expenses. In return, the funding party will just ask for a percentage of the relief granted. While some jurisdictions strictly prohibit the use of third-party funding, many accept it; we recommend you check with the requirements of your jurisdiction.

 

 

Privacy 

 

Parties can choose to hold their hearing in private and not publicize their awards. This maintains confidentiality and is especially essential to disputes surrounding Intellectual Property.

 

 

Flexibility 

 

Parties can choose their arbitrator, who are often experts that are incredibly knowledgeable in niche areas like construction. Parties can also decide on the language, venue of the hearing, arbitration rules, arbitration schedule, etc.

 

 

What are the disadvantages of Arbitration? 

 

Decisions can be unpredictable.

 

Courts follow a system of precedence where previous courts’ findings bind lower courts. In contrast, in arbitration, the arbitrator is solely responsible for conducting an assessment and any other decisions do not bind them. 

 

 

Selected arbitrators are not knowledgeable about the law.

 

While experts who are chosen to be the arbitrators often have a lot of technical knowledge, they may lack legal expertise. As such, having only one arbitrator means that they may not have sufficient experience to conduct a complete legal analysis of the dispute at hand.

 

 

Certain relief or remedies are not available.

 

Arbitrators are more restricted than judges. Although rules differ between jurisdictions, arbitrators usually cannot grant subpoenas, imprisonment, or injunctions. This poses adverse consequences because certain remedies are crucial in face of events (e.g., political arrest) and are needed to demand immediate action.

 

 

An overview of the process of arbitration? 

 

1. Forming an arbitration agreement

This is usually included in the parties’ contract.

 

2. The dispute arises

This refers to the conflict between the two parties, e.g., there is a breach of contract

 

3. Initiating Arbitration Proceedings

This involves one party sending a written notification to the other party to begin the process.

 

4. Formation of the panel

This requires the parties to select the arbitrators that will be hearing the case.

 

5. The Hearing

This is the point where the selected arbitrators will review the claims from both sides.

 

6. Panel issues an award

After the case has been heard, the arbitrators will decide on the issue, e.g., remedies will be granted, or the case is dismissed.

 

 

STEP ONE: Forming an arbitration agreement

 

 

What are the essential elements of an arbitration agreement?

 

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

 

Usually, the seat of arbitration and the venue of arbitration will be the same. However, Arbitration can be held virtually anywhere. During the COVID pandemic where there are many hurdles to travel, 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 determine the default rules for procedural orders. For example, if parties want England to be their Arbitration seat, the default arbitration rule that would apply is the Arbitration Act 1996. Parties can also choose to use procedural rules provided by their institution of choice:

 

    • 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."

 

There are also special 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 attach conditions that parties have to fulfil before pursuing arbitration, such as trying to resolve the dispute through negotiation, mediation, or conciliation. Only after a certain amount of time would the parties be eligible to initiate arbitration proceedings. Procedures like arbitration or litigation are therefore the final means of resolving a dispute. An example of a condition is that one provided by the International Centre for Settlement of Investment Disputes ('ICSID'):

 

  • "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 you use arbitration for? 

 

Commercial contracts 

Parties from different nations or in cross-border transactions can use arbitration to deal with breaches of contract, shipment problems, and sales of goods. In the commercial context, parties tend to prefer arbitration as it can be difficult to enforce foreign judgments. As of August 2020, 166 countries are parties to the New York Convention, meaning that the parties can 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 will therefore select arbitrators with a deep understanding of financial products and financial markets.

  •  
    • Construction and Energy

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

  •  
    • Shipping / Maritime 

      Most of these cases involve issues surrounding contractual interpretation. Many arbitrations in this field are "documents-only", meaning that oftentimes, parties can resolve the issue in Arbitration without any oral hearing. This is especially beneficial as shipping transactions usually operate across several jurisdictions at once. It is therefore useful to obtain an award without having to worry about its enforceability in other states. 

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

      IP, licensing, and data/system breaches due to human errors are common reasons for disputes in the TMT sector. These disputes are often highly technical and complex. Confidentiality is essential as customers of IT suppliers have access to their business strategies and procedures. It is in 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 this protection (e.g., fair and equitable treatment, any explicit promises or reassurances) may give an investor the right to sue the host state through investment arbitration. For example, a government promises 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 will then be left with properties without any practical usage. A company can then sue the government for taking away its license. 

 

 

Employment contracts

 

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

 

 

Professional Athlete contracts 

 

Since arbitration awards are final, many sports committees resolve their issues through arbitration. 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. Some common disputes include disqualifications (e.g., doping).  

 

 

STEP TWO: Dispute arises 

 

After the dispute has arisen, parties may try to negotiate or communicate with each other to settle before initiating the arbitration process.

 

 

STEP THREE: Initiating the arbitration process 

 

 

If attempts to negotiate for a settlement failed, one party will write a letter to the other party to request Arbitration to settle the matter. The other party will subsequently write back and agree to go to Arbitration.

 

 

STEP 4: Formation of the arbitral tribunal 

 

How are arbitrators chosen?

 

 

Next is the formation of the arbitration panel. Here are some common methods of selecting arbitrators:

 

  • The arbitration agreement

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

 

  • Institution

    Arbitration centres have procedures for 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

    This is where each party prepares a list of arbitrators and briefly describes their experiences and expertise. They then exchange the list and eliminate the arbitrators they object to and rank the remaining arbitrators in order of preference. The list is then handed to an appointing authority to review and decide on the panel's final composition.

 

  • Co-arbitrators decide on the presiding arbitrator.

    If the arbitration agreement requires three arbitrators, each party will 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.

 

  • Court-appointed

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

 

STEP FIVE: The hearing 

 

 

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

 

 

STEP SIX: Getting the award 

 

 

After the hearing, the 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 must pay for damages and arbitration costsDepending on the legal claim, sometimes the arbitrator can order a specific performance, compelling a party to do an action instead of paying a sum of money.

 

 

Case dismissed 

 

Where the arbitral tribunal has ruled in favour of the respondent, the complaining party may have to pay for all of the expenses of arbitration.

 

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

 

Sample Arbitration Agreements

 

DocPro has two versions of arbitration agreements for users to download:

 

1. Agreement to Arbitrate

Arbitration Agreement for dispute highlighting the date of arbitration and conditions of the arbitration including confidentiality, fees, costs, and legal status of the arbitration as well as the duties and authority of the arbitrator.

https://docpro.com/doc1578/arbitration-agreement-agree-to-arbitrate

 

2. Agreement to Settle

Arbitration settlement agreement for dispute highlighting the arbitration settlement amount, settlement date, and other settlement terms as full and final settlement of the dispute. Read more at:

https://docpro.com/document-search/arbitration https://docpro.com/doc1577/arbitration-agreement-agree-to-settle

 

 

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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Pooja Batra

Pooja has more than 8 years of in-house legal experience in large MNC’s. She has advised on a wide range of corporate and commercial matters including drafting, reviewing and negotiating a variety of commercial contracts and other agreements across various business lines. If you would like to become a contributor to DocPro, please click the link below:

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