The Nature of the Arbitration Clause in an International Commercial Arbitration

Publish : 11 Jan 2024

A well-drafted arbitration clause serves multiple essential functions, enhancing the efficiency of the arbitration process and, significantly, functioning as a robust mechanism for resolving disputes effectively. In doing so, it acts as a deterrent against breaches of the agreement, and consequently diminishes the likelihood of resorting to litigation. It is worth noting that the most critical provision within a contract to avert protracted and costly disputes is often the arbitration clause.

The efficiency of an arbitration clause is not contingent on its complexity, but rather hinges on a strategic evaluation of the client's anticipated stance in potential disputes and how this stance can be best articulated through an arbitration clause. This strategic contemplation is instrumental in optimising the potential for a successful and efficient dispute resolution process.

“The most critical provision within a contract to avert protracted and costly disputes is often the arbitration clause.”

It is evident, however, that a “one-size-fits-all” approach is not appropriate when devising arbitration clauses for diverse contracts. The formulation of an arbitration clause for international contracts demands meticulous consideration of various factors, including the contract's nature, the parties involved, the dispute categories envisaged and the legal jurisdictions that may be implicated in any dispute. Drafting an appropriate clause further necessitates a comprehensive understanding of the specific circumstances that may warrant the inclusion of specialised provisions, such as those addressing interim relief, confidentiality and other pivotal aspects (Arbitration Clause and International Contracts: An Analysis, by Dr Parachant S. Desai – see www.manupatra.com).

The inclusion of arbitration clauses in contracts is pursued to resolve future disputes efficiently and cost-effectively. A hastily composed arbitration agreement can become problematic, giving rise to issues of enforceability or ambiguity, and ultimately leading to protracted, costly legal disputes. When drafting an arbitration clause, certain obligatory elements must be integrated. Furthermore, a myriad of supplementary, discretionary provisions may be included, at the discretion of the parties.

“The inclusion of arbitration clauses in contracts is pursued to resolve future disputes efficiently and cost-effectively.”

It is important to emphasise that there is no universal “one-size-fits-all” or “generic” arbitration clause suitable for all contractual arrangements. Instead, each arbitration clause must be meticulously tailored to align with the unique context of the contract, as well as the specific requirements and preferences of the parties. The clause should consider the potential types of disputes that might arise, the parties' needs and the applicable legal frameworks. Regrettably, the arbitration clause often tends to be one of the last contractual provisions negotiated, frequently inserted as an afterthought, utilising generic language. Failing to incorporate essential provisions or neglecting to adapt the arbitration clause to the particularities of the given contract can result in inefficiencies, unnecessary conflicts and increased expenses once a dispute materialises. Nevertheless, when in doubt, opting for a straightforward clause like the model institutional clauses may prove to be the most prudent course of action.

Types of arbitration clauses in international commercial contracts

Arbitration clauses can be classified as basic, general or complex clauses.

  • Basic clauses encompass the most fundamental provisions necessary for a workable arbitration agreement. The majority of institutional model clauses fall into this category.
  • General clauses are commonly utilised in substantial transactions and extend beyond the basic provisions. They incorporate optional elements intended to address specific issues, such as determining the venue, language and applicable law, and stages like negotiation or mediation. General clauses come into play when some but not all of these potential provisions are required, or when the parties are reluctant to deviate from institutional rules or contravene mandatory legal requirements. This is often due to constraints on time and resources. Such clauses can be found in agreements related to the energy sector, including joint operating, drilling, natural gas supply and power plant construction contracts.
  • Complex clauses encompass a range of provisions, some of which may be unconventional and not universally accepted. Crafting complex clauses necessitates careful customisation to avoid inconsistencies, and thorough research to ensure that the provisions align with the jurisdiction's legal framework. In addition to the elements found in general clauses, complex clauses may include provisions related to confidentiality, discovery, multi-party arbitration, the consolidation of disputes, split clauses that mandate litigation for certain issues and arbitration for others, expert determination, arbitrability, waivers of appeals or consent to appeals, and authorisation to adapt the contract or fill gaps.

“The United Arab Emirates is an arbitration-friendly jurisdiction.”

The arbitration clause is a kind of specific agreement between the parties that reflects their mutual consent to raise their dispute outside the national courts, approving arbitration as the exclusive way to resolve their disputes in the future. There are some specific elements that should exist in the arbitration clause, such as:

  • the notification process or the legal notice by which either party can inform the other party of their intention to implement the arbitration clause;
  • the pre-arbitration process – sometimes, a specific period of time must lapse after the notification before the arbitration process commences (called the maturity of the arbitration clause); and
  • the mechanism of the arbitration process, such as:
    • the parties’ desired arbitration institute;
    • the seat of arbitration – ie, in which country/ jurisdiction the arbitration would be conducted;
    • the language of the arbitration – in most international commercial arbitrations, this is English; and
    • the number of arbitrators – if the parties have the right to choose the number of arbitrators who will conduct their dispute, they are free to decide on a sole arbitrator or three arbitrators as a tribunal committee.

These kinds of elements should reflect and express the parties’ free will, and this free will should be considered as an authorised declaration of the parties’ intention to use arbitration as a way to resolve their disputes instead of going through the ordinary litigation process (Nigel Blackaby, Constantine Partasides, Alan Redfern: Redfern and Hunter on International Arbitration (Seventh Edition) 2023).

The requirements for arbitration clauses in the UAE legal system

It is worth mentioning that the United Arab Emirates is an arbitration-friendly jurisdiction, which is truly notable in day-to-day commercial contracts. The importance of arbitration in the UAE comes from the diversity of society and from the solid, effective applicable law, which is Federal Law No 6 of 2018 on Arbitration. Article 7 of this law stipulates certain conditions that an arbitration clause must meet in order to be considered valid, as follows.

“1- An Arbitration Agreement must be made in writing, or otherwise it shall be null and void.

2- The requirement that an Arbitration Agreement be in writing is met in the following cases:

a- If it is contained in a document signed by the Parties or mentioned in an exchange of letters or other means of written communication or made by an electronic communication according to the applicable rules in the State regarding the electronic transactions.

b- If a reference is made in a written contract to the terms of a Model Contract, international agreement, or any other document containing an arbitration clause, where such reference is clear as to make that clause part of the contract.

c- If an Arbitration Agreement is made while the dispute is pending before the competent Court, the Court shall issue its decision confirming the Arbitration Agreement and the litigants shall freely initiate the arbitration proceedings in the place and time determined thereof and under the terms governing such arbitration, and the Court shall consider the lawsuit as if never existed.

d- If it is contained in an exchange of written statements between the Parties during the arbitration proceedings or upon acknowledgment before the Court, where one party requests that the dispute be referred for Arbitration and no objection is made by the other party in the course of his defense.”

This means that, in the UAE, certain requirements must be met for the arbitration clause to be considered valid, and must be written clearly in the agreement. Any referral to the arbitration clause in another separate agreement should clearly state that the parties have agreed to consider the arbitration mentioned in the other agreement as an integrated part of the contract; the court will not consider the arbitration clause if the referral to it is ambiguous.

Article From: https://chambers.com/legal-trends/defining-arbitration-clause 

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