An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process.
Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside of the courts, and is therefore considered a kind of forum selection clause.
There is no “perfect” model of an arbitration clause because not everyone wants the same procedure for dispute resolution.
Arbitration clauses depend on the underlying transaction and the client’s needs in a specific contract.
The key to drafting a perfect or complete arbitration clause is to pay sufficient attention to the underlying transaction so that the arbitration clause can be tailored to the client’s particular requirements and to possible disputes that may reasonably be anticipated.
Drafting care required
A bad arbitration agreement could result in double jeopardy: arbitration as well as litigation arising out of arbitration.
Therefore, care should be taken to draft an enforceable arbitration agreement.
However, a good arbitration agreement is one which minimizes complications when a dispute arises.
Before finalizing an arbitration clause, the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage.
Arbitration lawyers from all applicable jurisdictions must be consulted before finalizing any arbitration agreement.
A number of key issues must be kept in mind while drafting an arbitration clause:
- Simplicity: The language of the arbitration clause should be kept as simple and clear as possible, which should easily communicate the provisions of the arbitration clause without any ambiguity.
- Choice of law: The parties to the contract or agreement want to provide that the law of a particular jurisdiction should be followed. Unless the arbitration agreement itself clearly indicates that the arbitrator’s judgment on the law of the jurisdiction will be final and binding, such a clause invites a losing party to go to court to set aside the award on the grounds that the arbitrator has misapplied the law. A well-drafted arbitration agreement should clearly indicate whether the arbitrator’s judgment on questions of law will be final and binding, or subject to review in court and can also identify the jurisdictions whose law is to apply to the contract.
- Location of arbitration: The location of any arbitration hearing should be clearly stated in the arbitration clause.
- Number of arbitrators: The arbitration clause should provide for the number of arbitrators, depending upon the value of the contract and quantum of the anticipated dispute.
- Role of arbitrators: The parties can also agree to consider whether the arbitrators may also serve as mediators, trying to settle the dispute through settlement negotiations, or whether the role of the arbitrator will be strictly limited to deciding the dispute.
- Rules of evidence: It is a given in most arbitrations that the rules of evidence do not govern, and that the arbitrator has discretion to consider whatever evidence he wants. However, if the parties agree to a different result, then that should be mentioned in the arbitration clause.
- Decision format: The parties should decide the way a decision is to be announced i.e. whether orally at the close of the arbitration hearing, or a simple written award or a full written decision and this should be mentioned in the arbitration clause.
- Expenses: A well drafted arbitration clause should provide for the division of expenses incurred in arbitration. Depending on the parties, expenses can be divided equally or may be borne by one party wholly or in an agreed ratio.
- Appeal-enforcement: Arbitration awards are generally final and binding and this should be mentioned in the arbitration clause. Most statutes allow a court to get involved and set aside an award if the arbitrator exceeds his power. A well drafted arbitration clause should define the powers of the arbitrator.
- Provisional remedies: It should be decided at the outset whether parties will be allowed to seek provisional remedies from the courts such as an attachment or garnishment or preliminary injunctive relief, while arbitration is pending and this should be stated in the arbitration clause. Thus, keeping the above mentioned points in mind, the arbitration clause should always be modified as applicable under each set of circumstances.
One brush should not paint all paintings.
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