How to Draw Up an Undeniable Arbitration Clause

How to Draw Up an Undeniable Arbitration Clause

When negotiating international contracts, a subtle point which many forget, is a correctly and clearly formulated arbitration clause, on which it depends in which country, in which court and under what law possible disputes between the parties to agreement will be settled. In other words, the arbitration clause is called an arbitration agreement.

Often arbitration clauses are either skipped altogether or are not formulated correctly, which may lead such risks as litigation in another country with high litigation costs under foreign law, probably even without the possibility of the other party to participate.

But when it comes to trial, challenging the validity of the arbitration clause as well as proving the opposite is always extremely difficult, laborious and financially costly.

In this regard, we would like offer some basic rules, which may make it possible to reduce these risks to a minimum.

First, when concluding an international contract, you can use standard arbitration clauses developed by arbitration institutions in which the parties plan to consider the dispute. Their wordings are quite unambiguous and have been repeatedly tested in practice all over the world. You can find such clauses on the websites of the world's largest arbitration institutions, such as the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), the French Arbitration Association (AFA), the London International Arbitration Court (LCMA), the Swiss Chamber of Arbitration (SCAI), etc.

Second, if you are independently drawing up a contract, we recommend that you pay special attention to the unambiguity of the terms and definitions used. This means that when reading the clause, no one should see any double meaning, otherwise there is a risk of the clause being declared unenforceable.

Third, it is necessary to clearly indicate the cases where the arbitration clause applies, since the parties can single out certain types of disputes for which the clause will be valid, or extend its effect to any relationship between the parties under the contract and related to it.

Fourth, indicate the essential conditions: applicable law to avoid legal uncertainty, the desired number of arbitrators in order to reduce legal costs, the language of legal proceedings for a unified understanding of all parties.

And last but not least, it is the choice of the place of arbitration, which should be understood not so much the actual location (country, city) as the system by which your case will be considered.

Judicial systems are organized and operate in different ways in different countries. If you do not indicate the correct name of the arbitration institution to which the parties agreed to submit the dispute for consideration, there is a danger of confusion with the state judicial system of the country specified in the arbitration clause. In this case, any court will be forced to recognize such arbitration clause (or arbitration agreement) as unenforceable and will undertake to independently decide the issue of the possibility of considering a particular case.

At the same time, each arbitration clause (agreement) must comply with the general principles that apply in international law. If these rules are not followed, it shall be considerd invalid:

1. Voluntariness of the clause;

2. Unambiguously expressed intention of the parties to refer the dispute to arbitration;

3. Certainty about the arbitration procedure;

4. The parties have legal capacity;

5. Proper form of the arbitration agreement;

6. An indication of the specific legal relationship in relation to which the arbitration clause applies;

7. Arbitrability of disputes, in other words, the fundamental possibility of their consideration by a commercial court, and not by a court of general jurisdiction.

Due diligence at the stage of drawing up and concluding an international contract can significantly save your finances and efforts in the future, therefore we recommend that you contact TEAM for drafting and checking legality of all your contracts.