How To Write Arbitration Clauses: A Comprehensive Legal Guide

Arbitration clauses are increasingly used in commercial contracts to provide an alternative dispute resolution mechanism that can be faster, more cost-effective, and confidential compared to litigation. Drafting an effective arbitration clause requires precision, an understanding of applicable laws, and clarity to minimize future disputes over the arbitration process itself.

This guide is designed for lawyers, paralegals, business professionals, and anyone involved in drafting or reviewing arbitration provisions. It covers essential components, practical tips, legal considerations, and common pitfalls to avoid when writing arbitration clauses.

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1. Understand the Purpose and Scope of the Arbitration Clause

Before drafting, clearly define the purpose of the arbitration clause. Arbitration clauses delegate dispute resolution from courts to private arbitrators. Key points to determine:

• Which disputes are subject to arbitration?
  Specify the types of disputes (e.g., arising under the contract, relating to its performance, or even statutory claims if permitted).

• Who is bound by the clause?
  Identify parties included (e.g., subsidiaries, affiliates).

• What matters are excluded?
  Some disputes (e.g., injunctive relief, criminal matters) may be excluded from arbitration.

Practical Tip: Use precise language such as:

“Any dispute, controversy or claim arising out of or relating to this Agreement, including its formation, interpretation, breach, termination or validity, shall be resolved exclusively by arbitration.”

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2. Choose the Arbitration Rules and Institution

Specify the procedural framework that governs arbitration. There are three main approaches:

• Institutional arbitration:
  The parties agree to arbitrate under rules of a recognized institution (e.g., ICC, AAA, LCIA, SIAC). This provides a ready-made process and administrative support.

• Ad hoc arbitration:
  The parties craft their own rules or follow default rules such as UNCITRAL Arbitration Rules.

• Hybrid approach:
  Parties use institutional rules but modify certain provisions.

Practical Tip: Include the exact name of the arbitration institution and the edition of the rules:

“The arbitration shall be conducted under the Rules of Arbitration of the International Chamber of Commerce (ICC), 2021 Edition.”

Legal Consideration: Be aware of the institutional fees, procedures, and default seat rules, as these can impact cost and enforceability.

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3. Determine the Seat (Legal Place) of Arbitration and Language

• Seat of arbitration:
  The seat is the legal jurisdiction whose courts supervise the arbitration. It affects procedural law (lex arbitri), court intervention, and enforceability of awards.

• Arbitration venue:
  This is the physical location of hearings but can differ from the seat.

• Language:
  Specify the language of the arbitration to avoid ambiguity.

Practical Tip:

“The seat of arbitration shall be London, England. The arbitration proceedings shall be conducted in English.”

Legal Pitfall: Failing to specify the seat can lead to uncertainty and conflicts over applicable procedural rules and court jurisdiction.

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4. Appointment of Arbitrators and Composition of the Tribunal

Arbitrators decide the dispute. The clause should address:

• Number of arbitrators: Usually one or three. One arbitrator is cheaper and faster; three may ensure balanced decision-making.

• Appointment procedure: Specify how arbitrators are chosen, who appoints them, and timelines.

• Qualifications: Sometimes parties require arbitrators with specific expertise or nationality.

Practical Tip:

“The arbitral tribunal shall consist of three arbitrators. Each party shall appoint one arbitrator, and the two arbitrators appointed by the parties shall appoint the presiding arbitrator.”

Legal Consideration: Clarify default rules if parties fail to appoint arbitrators to avoid deadlock.

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5. Confidentiality and Interim Measures

• Confidentiality: Arbitration is generally private, but parties may want explicit confidentiality obligations regarding documents, hearings, and awards.

• Interim measures: Specify whether arbitrators have power to grant interim relief (e.g., injunctions, asset freezes) and whether courts can provide such relief.

Practical Tip:

“The parties agree that all arbitration proceedings, including all documents and awards, shall be confidential and shall not be disclosed to any third party without prior written consent.”

“The arbitral tribunal shall have the power to grant interim measures as necessary to preserve the status quo or prevent harm.”

Legal Pitfall: Some jurisdictions limit arbitrators’ power to grant interim relief, so parties may want to expressly preserve court intervention rights.

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6. Enforceability and Governing Law

• Governing law of the arbitration agreement: Often the same as the contract’s governing law but can be distinct.

• Separability: Arbitration clauses are generally separable from the contract, meaning arbitration can proceed even if the contract is challenged.

• Enforcement: Reference international treaties (e.g., New York Convention 1958) to reinforce enforceability of arbitral awards.

Practical Tip:

“This arbitration agreement shall be governed by and construed in accordance with the laws of the State of New York and is intended to be separable from the main contract.”

Legal Consideration: Ensure the governing law chosen supports arbitration and that local courts respect arbitration agreements to avoid challenges to validity.

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FAQ

Q1: Can I force arbitration for any dispute?
Not always. Certain disputes, such as criminal matters or specific statutory rights, may be non-arbitrable under applicable laws.

Q2: What if one party refuses to participate in arbitration?
The other party can apply to a court to compel arbitration based on the arbitration agreement, subject to jurisdictional rules.

Q3: How do I ensure the arbitration award is enforceable internationally?
Use a seat in a jurisdiction that is a party to the New York Convention and clearly state the arbitration agreement’s enforceability.

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Arbitration clauses require careful drafting tailored to the specific contract and parties involved. Clear, comprehensive clauses reduce uncertainty, avoid procedural challenges, and support efficient dispute resolution. Always consider the interplay between arbitration rules, governing law, and the commercial context to draft clauses that protect your client’s or business’s interests effectively.

Further Reading

• American Bar Association — Authoritative resource offering guidance and best practices on legal drafting, including arbitration clauses.
• Cornell Law (Legal Information Institute) — Comprehensive legal information and explanations relevant to contract law and arbitration provisions.
• FTC Business Guidance — Useful for understanding regulatory considerations and compliance when drafting arbitration clauses.