Drafting effective arbitration clauses

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Smooth conduct of arbitration requires a well-drafted arbitration clause, which must not only be enforceable but also conducive to speedy dispute resolution and tailor-made to minimize procedural disputes.

K K Cheung
K K Cheung

Ad hoc arbitration gives the parties more flexibility and autonomy in the arbitration proceedings, whereas institutional arbitration is known for administrative convenience and the institutions’ supervisory functions. In choosing among arbitration institutions, factors such as language, reputation of the arbitration institutions and institutional arbitral rules should be considered.

Leading institutions provide model clauses for parties to consider. Depending on the case, parties are encouraged to follow the model clauses as closely as possible. If the parties opt for administered arbitration, the chosen institution will provide administrative support to the parties throughout the arbitration. On the other hand, the parties have to follow the procedures of the rules of the institution, which are more elaborated.

It is prudent for parties to seek local legal advice in drafting arbitration clauses to ensure compliance with legal requirements. For instance, arbitration proceedings in China must generally be administered by recognized arbitration institutions. In Hong Kong, arbitration agreements must be in writing. For arbitration in China with anticipated enforcement in Hong Kong, it should be noted that the mainland arbitration institution must be on the list of recognized mainland arbitral authorities gazetted by the Hong Kong government.

APPLICABLE LAW

Absent any express designation of the applicable law of the arbitration, the arbitral tribunal will determine the applicable law based on the parties’ intention and the conflict of laws principles. For the avoidance of doubt, parties are advised to stipulate their choice of law in the arbitration agreement.

Sometimes the governing law of the contract may be different from the procedural law of the arbitration. For the sake of clarity, the applicable procedure law of the arbitration should be expressly stated in the arbitration agreement. The place of arbitration concerns the procedure and enforcement of the arbitration. Factors such as neutrality, language and local judicial attitude towards arbitration are relevant. Parties are advised to designate the place of arbitration at a contracting member state to the New York Convention if enforcing the award worldwide is needed.

Parties may agree on the language to be used in arbitration. Without agreement, the default language in PRC arbitration is Chinese, while arbitral tribunals in Hong Kong can determine the language in the proceedings.

Practically speaking, the choice of language affects the pool size of potential arbitrators and legal advisers and the ease of the witnesses to give evidence. Translation of documents is time and cost consuming. In cases where numerous marginally relevant documents are translated, the costs on translation may be unworthy of incurrence.

NUMBER OF ARBITRATORS

The usual practice is that the arbitral tribunals are constituted by either one or three arbitrators. If the arbitration clause is silent on the number of arbitrators, the number is determined according to the relevant local law and/or arbitration rules.

The number of arbitrators has a direct impact on the costs and the length of the arbitration. To explain, delays in three-member arbitration proceedings are not uncommon due to the arbitrators’ difficulties in fixing the dates of arbitration. But a three-member arbitral tribunal has its merits. In case one member of the tribunal cannot act as arbitrator for whatever reason, the other two arbitrators may continue with the case with the consent of the parties.

NATIONALITY OF ARBITRATORS

Parties may wish to restrict the nationality of the arbitrators for the sake of impartiality and neutrality. In this regard, parties should be aware of the difficulty in finding arbitrators of the preferred nationality. For example, arbitrators of PRC arbitration must be appointed from the panel of arbitrators of the designated arbitration institution, unless the parties agree otherwise and the chairman of that institution confirms so.

Given the variety and complexities of commercial disputes, it is impossible to have a one-size-fits-all arbitration clause. Terms additional to the model arbitration clauses and to the above may be required to suit particular cases. In anticipation of multiparty arbitrations, terms on joint appointment of arbitrators, joinder and consolidation are necessary. In drafting multi-contract arbitration clauses, particular attention should be paid to the possibility of consolidation of arbitral proceedings and cross-referencing between contracts.

It is never too early to agree on arbitration clauses. Parties are always encouraged to agree in advance how the arbitration should be conducted. Once disputes have arisen, every point, be it substantive or procedural, can be a point of contention. Instead of keeping the arbitration clauses silent on arbitration arrangements, the above-mentioned issues should be considered with other case-specific features.

K K CHEUNG is a partner at Deacons in Hong Kong