• Koluman Law

How to Draft an Effective Arbitration Agreement and the Problem of Pathological Arbitration Clauses

Judgment is a state-owned function; it is essential that disputes arising between the parties be resolved in state courts. However, if the parties mutually agree, this jurisdiction that belongs to state courts, can be used by arbitrators in certain situations. Arbitration is the judgment made as a result of an agreement between the parties on the resolution of disputes arising or may arise between the parties, by means of independent arbitrators who derive their powers from this agreement, instead of solving their disputes with state jurisdiction. In arbitration both sides to a dispute agree to let a designated third party, the arbitrator or the arbitral tribunal decide the outcome of that legal dispute.


In general, the arbitration agreement (arbitration clause) provides the basis for arbitration; it is usually spelt out in the main contract between parties as an arbitration clause or it may be conducted in a separate agreement concluding mutual intentions of parties’ for submission to arbitration. It is defined as an agreement to submit present or future disputes to arbitration. Arbitration agreement is the expression of the intension of the parties to withdraw their disputes from national courts and to submit them to arbitral proceeding; the parties’ consent provides the underpinning for the power of the arbitrators to decide the dispute.


An arbitration agreement will only deliver results if the clause or agreement to arbitrate is valid; in other words, if there is to be a valid arbitration there must first be a valid agreement to arbitrate. It is not possible to apply to arbitration proceedings without a valid agreement between the parties; the arbitration agreement that reflects the existence of the intention to go to arbitration mutually will enable the arbitrators to make a decision on the dispute and consequently to enforce this decision. The main reason for seeking a mutual and appropriate declaration of will to arbitrate, and consequently an arbitration agreement, is that any party that does not have the intention to arbitrate for dispute resolution cannot be forced to participate in arbitration proceedings. Under both the New York Convention[1]and the UNCITRAL Model Law[2], it is stated that recognition and enforcement of an award may be refused if the arbitration agreement was not valid under its own governing law.


In order to talk about a valid arbitration agreement, it is not enough that the intention of the parties in the agreement are mutually exclusive; at the same time, these intentions should be clearly understood. Some arbitration clauses contain defective elements as, (i) they may be drafted by persons with little or no experience in arbitration, (ii) they may be drafted in haste when the contract is almost complete, (iii) drafter may be clumsy, (iv) or they may be just sloppy cut-and-paste jobs; and these defects they may give rise to uncertainty. In literature, such defective clauses are called “pathological clauses”. The expression “pathological clauses” was first used by Frederic Eisemann, to identify arbitration agreements and arbitration clauses which contain defects or mistakes liable to result the smooth progress of arbitration. Such clauses can be a source of conflict for the entire duration of the dispute, from the enforcement stage to the annulment of the decision.


Arbitration clauses can be pathological in various reasons; such as, the reference to an arbitration institution may be inaccurate or more than one institution may be specified in the clause, arbitration may appear as an option to state courts, language of the clause may be permissive, clause may be incomplete or may require the intervention of third parties who refuse to participate. Such clauses may give rise to difficulties in initiation of the arbitration; but they are not necessarily null, void or ineffective and they may not prevent the conduct of the procedure because case law and the arbitration practice try to interpret them in a pro-arbitration approach.


These defects may give rise to associated litigation at the stage of review of the application for the annulment of the decision or in the stage of enforcement; fueling the arguments of the party attempting to avoid arbitration and delaying the parties' reaching their intended goals by making the overall process more time-consuming and expensive. At worst, when it is impossible to infer an intention which is sufficiently coherent and effective to enable the arbitration to function, these defects will prevent the arbitration from taking place at all.


How to draft an effective arbitration clause:


· Parties’ intention to arbitrate should be clearly stood from the clause. Failure to include the word "arbitration" in the arbitration agreement between the parties may result in invalidity of the clause.


· In order to have a binding arbitration agreement, permissive language like “shall” or “may” should be avoided.


· Authorization of more than one arbitration institution or combining the arbitration rules of these institutions should be avoided. Hybrid arbitration clauses can create problems in practice.


· If institutional arbitration is selected, most precise way to draft an effective clause is to use samples that are published on the websites of the relevant institution. Most of the time, these samples lead drafters to successfully draft a clause which will enable parties to arbitrate.


· While drafting the clause, before referring to an arbitration institution, checking whether that institution still exists or accepting new cases, or even contacting the institution directly and getting opinions on this matter will prevent future problems.


· A basic clause is a safer clause: In clauses to be arranged by people without expertise in arbitration, each provision to be added to the clause will increase the possibility of invalidity of the agreement. Therefore, sticking to the simple will help reduce this risk.


· Before the arbitration clause is issued, the validity conditions of the law to be applied to the validity of this agreement must be double-checked and the clause must be made compatible with these conditions.


- But the most important of all is getting help from a lawyer experienced in arbitration during the drafting of the arbitration clause. Arbitration clauses, which are not properly drafted at the beginning, may cause serious problems in obtaining the desired result when the parties want to seek their rights in the future.

[1]Article V (1): “Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made…[2]Article 36 (1): “Recognition or enforcement of an arbitral award, irrespective of the country in which it was made, may be refused only: At the request of the party against whom it is invoked, if that party furnishes to the proof that: competent court where recognition or enforcement is sought a party to the arbitration agreement referred to in article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.”

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