Avoiding defective clauses in International Arbitration

[Music] Welcome back everyone to the podcast series brought to you by the International Arbitration Group at Dentons with more than 40 partners and 120 lawyers. Our group is widely recognised globally, trusted by corporations, states and high net worth individuals for the most challenging international arbitration matters. So today we're going to discuss how to avoid defective arbitration clauses. Just a quick intro, I'm James Langley, I'm a partner in the International Arbitration team at Dentons London, specialising in commercial and invest the state arbitration. And my name is Rachel Howey, I am a partner based in Canada and the co-lead for our Canadian litigation and dispute resolution group along with the co-lead for our national ADR and arbitration group. We are very pleased to have with us today Dr. Peter Becker, a partner in Dentons International Arbitration Group and resident in the firms New York office. Peter's practice focuses on international dispute risk management and resolution and advice regarding issues of public international law in which he has a doctoral degree. He has experience as council with all the major arbitration procedures and institutions along with experience as an arbitrator being listed on the AAA panel of International Arbitration Neutrals. Welcome, thanks for joining us Peter. Thank you Rachel, peace to be with you also James. And to jump into our questions for you today, we'll start with a kind of a basic one but a complex one nonetheless as regards to the composition of an effective arbitration clause for international contract. What are the important elements to consider and what are the common pitfalls in relation to those elements? Yes, so I released a book last year called Arbitration of International Disputes in New York, published by Juris and I have a lengthy final chapter in that book where I discuss defective clauses really focuses focusing on the elements that every clause should contain and then also some of the pitfalls. It needs to be kept in mind that arbitration is a creature of contract and that it is a specialized kind of form selection clause that expresses the consent of the parties and also defines both the basis and the extent or the outer limits of arbitral jurisdiction. And so this is an opportunity for parties really to shape the arbitral process to their particular needs through their arbitration agreement and parties have great freedom to contract but there are certain dangers in letting parties go wild on their clause. So a poorly drafted arbitration clause presents several dangers. First, it may preclude arbitral jurisdiction altogether and second and at the very least it likely will lead to court challenges in collateral litigation and added legal fees in the future and third, it reduces predictability of the time, expense and outcome of an eventual arbitration. So a good starting point for drafting an arbitration clause is to adopt the standard clause suggested by established arbitration institutions such as the American arbitration association or the International Chamber of Commerce or the uncytrol model clause for non-administered arbitration and then to ask the question of whether it is sensible to supplement the language of the standard or model clause with additional elements or provisions, in light of the specific characteristics of the party's relationship and what need to be kept in mind are the twin goals of certainty and predictability. So we would definitely like to see certain court or provisions as part of any arbitration clause and they are essentially three, firstly exclusivity of arbitration as a dispute resolution mechanism. Second, the scope of the dispute to be arbitrated and third, and you reference to applicable arbitration rules. So just taking these and turn quickly on the exclusivity given that we are trying to provide for alternative dispute resolution, alternative to litigation, court-based litigation, really the clause needs to express that it is the sole or exclusive method for the resolution of dispute. And the biggest mistake that parties make is that they use the word may resort to arbitration as opposed to shell and shell is mandatory, may is facultative. So this we see in practice as being an issue when one party invokes the clause against another party. And the second is the scope. So it's really important to set out what disputes or claims will be subject to arbitration. So the clause must clearly identify the scope of the disputes that fall under the arbitration clause. It's what we call arbitrability or more accurately arbitral jurisdiction. And typically we use language like all disputes between the parties arising out of or in connection with that's sort of the magical formula that captures both contractual and extra contractual claims. And the third core element is a reference to applicable arbitration rule. So it's good practice to provide for some framework, regulating the arbitral process by incorporating by reference established arbitration rules. And nothing I fancy here, but just to go with the leading arbitral institutions and their standard or model rules that have been developed over years and tried and tested in practice. Now ad hoc arbitration that is non-administered, maybe no administrative fee is an option, but it is very tricky one. And so the preferred option is to select institutional arbitration or the un-straw arbitration rules with an appointing authority in case there is unwillingness to aid in the constitution of the arbitral tribunal. So those are the three core provisions and you will see them referenced in any model clause. But then they're also highly recommended and facultative or optional provisions. And among the highly recommended ones are the place or the seat of arbitration. It's very important to cite the arbitration somewhere because that will mean that any challenge brought needs to be brought in that jurisdiction. If the place is not indicated or is not indicated clearly, then the arbitral tribunal typically will decide after consulting with the parties. But that's an very important consideration for any clause. And sometimes we see vague references, maybe just a reference to a place as opposed to a place and a country. There is a Geneva in New York in addition to Geneva Switzerland. So that's one, the language of arbitration sometimes gives rise to issues, especially in the cross-border contact where we have parties that have different languages. Maybe the contract is in English, but the parties and the party's documents may be in English and say Spanish or not a language, maybe French. So the language should be indicated. That's a very simple sentence. And then the number of arbitrators and arbitrators' selection procedures. And typically there's deference to the arbitration institutional rules, but the parties have an opportunity here to really specify what kind of background they would like to see. And the arbitrate is that will serve as quasi-judges, really, as adjudicators of their dispute. And then I will also mention the applicable substantive law. So substantive laws typically set forth in a governing law clause that's separate from the arbitration clause. But given the doctrine of separability, we typically would like to repeat the arbitral and the arbitral clause, the governing law for the arbitrators to use. Why? Sometimes the contract can be void, can fall away, but the arbitration clause will always stand because of the separability doctrine. So it is good practice to also specify the arbitration clause, what kind of governing law the arbitrators are supposed to use. Then one has to be very careful to keep it consistent with the governing law clause in the contract. Then finally, facultative provisions which are optional, nice to have. But again, there's an opportunity to make mistakes in the drafting. One important element is to really specify who are the parties to the arbitration clause. So I mentioned earlier on that it is good practice to reference that any disputes between the parties arising out of or in connection with the arbitration, the contract should be specified. So a lot of parties actually do not set out the parties, maybe in a definitional provision at the outside of the contract. And then another. pitfall, potential pitfall is so-called step or multi-tier clauses where you go from negotiation to mediation and then ultimately to binding arbitration. And the biggest mistake parties make there is to not specify the time limit between those steps. And that really is an opportunity for an unwilling party to push back and not let the other party go to the next step or stage in the dispute settlement mechanism. I will also mention discovery or what is known as document production. So that's also case specific. If the parties believe that the case will have to will depend on the production of documents given that that is not the practice in international arbitration and depending on what jurisdiction they're in, they better provide for some type of document production mechanism, for instance by referencing the MBA rules on evidence. So those are just some of the elements that we would like to see in a clause that also provide for the defects that we often see as practitioners. It's the rare case that where the parties have drafted a perfect clause that does not have defects that need to be addressed by arbitration lawyers. Thank you for that, Peter. We always say that you don't want to have a dispute about your dispute clause. That's a bad way to start. So you mentioned exclusivity and I was wondering what if one of the parties to an international contract would like to have the option to result to the to the courts instead of arbitration for a given dispute or issue? How do they do that? So these are what are called sole option or asymmetrical clauses. We do see them especially in the banking sector where lenders would like to have the option of either going to a court-based litigation or arbitration. So it is a dispute resolution mechanism in the contract that provides one, but not both of the parties with the option to resort to the courts in relation to defined disputes or issues in lieu of arbitration and sometimes parties try to give both parties that option, but it is really, really important to specify exactly what situation would trigger that option as opposed to having an exclusive remedy in the form of arbitration. So because it is tricky to draft, this type of clause is symmetrical is not recommended because it carries additional risks of inaccurate or contradictory drafting and of future disagreements regarding what disputes or issues are subject to litigation as opposed to arbitration under the clause. In New York, where I practice, option contracts are unquestionably valid despite their lack of mutuality of obligation. This has been held by the Court of Appeals and lower federal courts and including the state courts. And maybe just in the minute or two that we have left, Peter, are there any unusual provisions in local arbitration law of leading arbitral venues that you learned about in the course of writing your book that parties should keep in mind when selecting a certain venue for their contractual arbitration? Yeah, so in New York, the legal context of an arbitration is governed by both federal law in the 100-year Federal Arbitration Act and the New York Civil Practice Law and Rules, especially Section 75, that's the arbitration law of New York. It's even older than the federal law. And it has certain quirks in terms of, for instance, the arbitral award that it needs to be affirmed in so many words by arbitrators. In the case law, there are some quirks including that the Court of Appeals, the Federal one, still has in the case law a provision for setting aside arbitral awards for manifest disregard of the law on the part of the arbitrators. But it is really that letter that the courts have not applied that ground for setting aside an arbitral award in quite some time, but it has never been overruled. So that's something to watch, but it's not really a factor, but always the state rules have to be read in conjunction with the federal rules, at least here in New York, depending on what jurisdiction you're in, so as to be familiar with both the federal and the local state rules. Thank you very much for those insights, Peter. Our next episode involving international arbitration in Africa will be forthcoming in a few weeks. Gentans is a global legal practice providing client services worldwide through its member firms and affiliates. This episode is not designed to provide legal or other advice and you should not take or refrain from taking action based on its content. PCDentans.com for legal notices.