Practical Guide Series: Drafting Arbitration clauses

Lim Ying Hui explains how to avoid common pitfalls in drafting arbitration clauses

 

 

Arbitration is increasingly becoming the preferred mode of resolving commercial disputes. One of the advantages which attracts people to resolve disputes by way of arbitration is the autonomy that is conferred on the parties. The parties are able to choose how many arbitrators they would want to determine their dispute(s), who the arbitrator(s) is/are going to be, the procedure in which the arbitration is to be conducted, the law which is to govern the arbitration agreement etc. This article aims to highlight some of these issues which might be considered when drafting or choosing an arbitration clause.

 

 

AVOIDING PATHOLOGICAL ARBITRATION CLAUSES

These are arbitration clauses which jeopardise the success of the arbitration. Examples include clauses which provide for a deceased or non-existent person as arbitrator, appointing and/or supervising authority. The same applies to clauses which attempt to provide for the application of particular rules by an institution ill-equipped to do so. For example, the ICC Rules which provide for the review of awards by a permanently constituted advisory board, which may well be absent from the constitution of alternative supervising bodies.

 

 

NUMBER OF ARBITRATORS

The norm is either to have a sole arbitrator or 3 arbitrators. The number of arbitrators should be dependent on the magnitude and complexity of a contract. It would not be advisable to have 3 arbitrators where the contract value is not very high because the cost of having 3 arbitrators may outweigh the benefits of resolving the dispute by way of arbitration. Where the contract is simple and may be determined by a sole arbitrator, it will also not be necessary to have a tribunal of 3 arbitrators.

 

Parties must bear in mind that in Malaysia, where no number of arbitrators is stipulated in the agreement the default position is that there will be one arbitrator in the case of a domestic arbitration and 3 arbitrators in the case of an international arbitration.

 

 

PROCEDURE FOR THE APPOINTMENT OF ARBITRATOR(S)

Where the arbitral tribunal is to consist of only a single arbitrator, the parties would usually attempt to agree on the identity of the arbitrator when a dispute arises. However, it is important to provide for a default position in the event parties are unable to come to an agreement because it is likely that parties will not be able to reach such an agreement. Without a default position, the arbitration process may be frustrated. In the event the arbitration is to be governed by a set of institutional rules, it is likely that a default position would be provided in such rules but if the arbitration is not governed by any institutional rules, the parties should stipulate an appointing authority. An appointing authority will usually be an institution such as the Regional Centre for Arbitration Kuala Lumpur (“KLRCA”), Singapore International Arbitration Centre (“SIAC”), International Chamber of Commerce (“ICC”) etc.

 

Where the arbitral tribunal is to consist of 3 arbitrators, the parties may decide on any procedure which they are comfortable with but the norm would be that each party is to appoint an arbitrator and the arbitrators appointed by the parties would jointly nominate the presiding arbitrator. It would, again, be important to stipulate for a default position in the event the arbitrators appointed by the parties are unable to agree on the presiding arbitrator.

 

 

OPTING IN AND OPTING OUT

 

Pursuant to Sections 3(2) and 3(3) of the Arbitration Act 2005 (“the Act”), Part III of the Act will:-

 

(a) apply to a domestic arbitration;

(b) not apply to an international arbitration,

 

unless otherwise agreed to in writing by the parties. Therefore it is important for parties to consider if they would like the provisions contained in Part III to apply to their arbitration.

 

Part III of the act contains provisions relating to (i) consolidation of proceedings and concurrent hearings; (ii) determination of preliminary point of law by court; (iii) reference on questions of law;

(iv) appeal; (v) costs and expenses of an arbitration; (vi) extensions of time for commencing arbitration proceedings; and (vii) extensions of time for making an award.

 

When agreeing to exclude or include Part III of the Act, the parties may agree to exclude or include Part III in whole or in part.

 

 

SEAT AND VENUE

The seat of the arbitration refers to the geographical location where the arbitration is ultimately tied and which prescribes the procedural law of the arbitration. Any enforcement proceedings, application for interim measures would have to be made where the seat of the arbitration is. Therefore it is important for the seat to be in an arbitration friendly jurisdiction.

 

The venue of the arbitration does not need to be where the seat of the arbitration is. The venue of the arbitration hearing/meeting should be a place convenient for all parties including the arbitrators.

 

 

INSTITUTIONAL RULES

There are many institutional rules which have prescribed arbitration rules. To name a few, there is the KLRCA, SIAC, ICC, Hong Kong International Arbitration Centre (“HKIAC”), London International Court of Arbitration (LCIA) and United Nations Commission on International Trade Law (UNCITRAL).

 

Some institutions provide more administrative functions, such as the appointment of arbitrator(s), payment of arbitrator’s fees, challenges for bias, venue and scrutinizing awards prepared by the Arbitral Tribunal. Institutions which provide administrative services would charge an administration fee which would add to the cost of arbitration. Therefore, when deciding which rules to adopt, the parties should bear in mind the level of administration and the cost of these institutions.

 

 

CONSOLIDATION

When drafting the arbitration clause, parties should also consider whether there may be other contracts (to which either one or both of them are a party to) that relate and would affect the contract in question. If there are, the parties may consider whether or not to provide for the possibility of consolidation with other arbitration proceedings or whether concurrent hearings may be held. Such an agreement must also be reflected in the other related contracts as consent is the cornerstone of an arbitration agreement.

 

 

CONCLUSION

This article does not discuss all issues which may arise in the drafting of arbitration clauses, but instead highlights some simple and basic elements which should be considered by contracting parties when drafting such a clause. In general, if the parties do not apply their minds to an issue when drafting the arbitration clause, the Arbitration Act 2005 will supply the deficiency. The parties may not get the arbitration that they hope for, but they will get an arbitration. By contrast, where parties make uninformed choices, there is a real risk of creating a pathological clause, which may result in no arbitration at all.

 

 

LIM YING HUI ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 

Ying Hui is a graduate from the University of Sheffield. She is an Associate in the Alternative Dispute Resolution Practice Group of SKRINE

 
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