Drafting an effective international arbitration agreement – tricks and traps

Introduction Arbitration is an effective process to resolve disputes that arise in international transactions. If properly managed, arbitration is a time and cost efficient method of dispute resolution that culminates in a binding and internationally enforceable decision. But unlike national courts which exercise the coercive power the state, an arbitral tribunal derives its power from the consent of the parties as found in the arbitration agreement. Therefore, the success of an arbitration, and by extension the protection of parties' legal interests, rests largely upon the wording of the arbitration agreement.

Many arbitration bodies provide excellent model clauses or example arbitration agreements. But they are not well suited to every transaction and every type of dispute. This article will provide an overview of international arbitration before discussing some of the most important 'tricks and traps' parties and their lawyers need to be aware of when negotiating an arbitration agreement.

The benefits of international arbitration There are many and varied benefits to arbitration as opposed to litigation in a court. Depending upon the transaction and the parties involved, it is likely that some benefits will be perceived as more important than others. It is critical that those benefits most important to the parties are borne in mind when negotiating the arbitration agreement. After all, a poorly drafted or poorly thought out arbitration agreement can undermine the perceived advantages of arbitration.

Expertise of arbitrators

Unlike in court litigation, where disputes are heard by a judge who is allocated to the case, arbitration permits the parties to nominate the arbitrators to determine the dispute. So, while some disputes might be well suited to resolution by a legal expert, others might be highly technical or require divergent expert evidence concerning questions best left (for example) to engineers, quantity surveyors, or builders. In those circumstances, the ability to match the skills of the decision maker to the issues in dispute is an obvious advantage.

Flexibility of proceedings

Arbitration offers greater procedural flexibility than litigation. Litigators are bound by those rules of court and evidence in the jurisdiction in which a matter is heard. Strict, mandatory rules can be beneficial in some circumstances, but they are also costly and can hinder progress of the dispute. Arbitration rules often permit parties to agree on time limits; confidentiality; location of oral hearings; the language of documents and hearings; and even whether the tribunal will make a decision according to law or according to justice and fairness.

Neutrality and avoidance of national courts

As a method of dispute resolution divorced from local courts, arbitration offers parties a neutral forum and access to demonstrably neutral decision makers. Because of the supervisory role played by the courts of the seat of arbitration,1 parties often prefer to have their arbitration determined in a neutral jurisdiction. Parties have the opportunity to arbitrate according to neutral rules and procedures, disconnected from domestic jurisdictions.

Limited recourse against the award

Once an award is made, it is usually only able to set aside on limited grounds such as jurisdictional error by the tribunal or breach of public policy. This is contrasted with the wide grounds on which a decision of a first instance judge may be appealed.2

Ease of enforcement of arbitration agreement and award

By virtue of the New York Convention on the Recognition and Enforcement of Arbitral Awards

(the New York Convention), awards are easily enforceable in a variety of jurisdictions around the world. The New York Convention has been signed by more than 155 nations worldwide.3 As its name suggests, it regulates the international enforcement and recognition of foreign awards. At its simplest, it compels state parties' courts to recognise and enforce international arbitral awards unless the relevant arbitration agreement, the tribunal, the proceedings, or the award do not satisfy the limited requirements set out in the New York Convention.

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