This article has been written by Akshay Jaulkar pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho).
Whenever there are two or more parties involved in any transaction, disputes are bound to occur. Some disputes get resolved amicably, and some might get worse over a period of time. Thousands of contractual / non-contractual disputes arise around the world everyday and if all of them are to be settled by the courts, it will take years to finalize them. In such a scenario, the Alternative Dispute Resolution (ADR) methods viz. Arbitration, Mediation and Conciliation play a vital role in the settling of these disputes out of the court. Amongst the available ADR options, ‘Arbitration’ is the most widely and commonly used legal method of dispute resolution.
However, it is very important that while drafting the Arbitration clause one should ensure that it is done without leaving any room for misinterpretation and is airtight to make it more efficient for dispute resolution.
Definition and principles of Arbitration
As per the Britannica Encyclopedia, “Arbitration is a nonjudicial legal technique for resolving disputes by referring them to a neutral party for a binding decision or award”.
Principles of arbitration
- Arbitration is consensual
The parties involved agree mutually to go for resolving the dispute with the chosen Arbitration method.
- Arbitration in neutral
Due to the involvement of a neutral third party (which is chosen by the parties) involved in the dispute, an unbiased decision can be anticipated. In addition, parties while negotiating the Agreement get the chance to choose the type of Arbitration, governing law, language, and the place of Arbitration.
- Arbitration is confidential
If a dispute between the two famous corporations goes to court, media attention is inevitable. On the contrary, Arbitration and its result can be managed to be delivered in a strictly confidential manner. Sensitive information remains intact and within the walls of the disputed parties
- Freedom of appointment
Parties get to choose which and how many Arbitrators they want to appoint to resolve the dispute.
Essentials of drafting an airtight Arbitration Clause
Following elements shall be essentially included while drafting the Arbitration Clause or while proceeding for the Arbitration:
- Type of Arbitration
Out of the total 4 available types of Arbitration viz. Ad hoc, Institutional, Contractual and Statutory, it is crucial for the parties to agree upon the procedure of the Arbitration to be followed for resolving the dispute.
In Ad-Hoc Arbitration, parties at their will, have the option to alter or customize all of the below mentioned essentials of the Arbitration.
In Institutional Arbitration, worldwide or national organizations / institutions are approached by the parties to resolve their dispute. Some of the international parties are International Chamber of Commerce (ICC), the London Court of Arbitration (LCIA), Singapore International Arbitration Centre (SIAC). However, Parties have to pay standard fees to such organizations.
In Contractual Arbitration, the parties while entering into the Agreement make the provision that mentions the method of resolution in the event of a dispute, and to which arbitrator the dispute shall be referred to, etc. Everything related to Arbitration is well thought and agreed over before signing the Agreement.
In Statutory Arbitration, as the name suggests, the parties have to follow the legal arbitration proceedings of the law of the land where the work is being executed. Unlike the above three (3) types of Arbitration, this type offers very limited to no freedom to customize the elements of Arbitration.
- Threshold of Arbitration
The triggering point to refer to the dispute for Arbitration shall be definite. Usually, parties in dispute first try to resolve the dispute amicably, and without the involvement of any third party, due to the cost and time involved and to keep the confidentiality of the information. Typically, parties take a month or two to resolve the dispute without the involvement of any third party.
- Appointment, qualification procedure and Numbers of the Arbitrators
How the arbitrator will be appointed, from where the Arbitrator(s) should be, having what qualifications (such as techno-commercial background, IP related knowledge, etc.) and in how many numbers (typically 1 or 3) shall be clearly defined in the Clause.
- Seat or Place of Arbitration
The place or seat where the dispute shall be presented to the Arbitrator(s) shall be negotiated between the parties. However, due to the costs involved in setting up the Arbitration, it is recommended to define the place of Arbitration in the Agreement itself.
- Rules of Arbitration
Rules to be followed for arbitration whether as per the law of the land or as per the international laws shall be mandatorily specified in the Agreement. Which rules to be followed plays a crucial role in obtaining the result of the dispute. There are sets of rules defined by most of the nations for internal disputes and international bodies such LCIA, SIAC etc. for international projects and businesses.
- Scope of the Arbitration
Which issues can be referred to the Arbitrator(s) and which cannot be, shall also be defined in the clause. Personal disputes cannot be resolved through the Arbitration scope meant for commercial dispute resolution. However, parties generally choose not to bind themselves with such definitions and generally keep the clause open so that any type of commercial dispute arising out of the transaction can be referred to the Arbitration.
- Cost Obligations
In the event a dispute is referred for Arbitration, how the cost will be distributed/divided amongst the parties, equally or in an agreed ratio or it is to be totally incurred by the party who is referring the dispute to Arbitration.
- Time period of the result
The limited timeframe within which the Arbitrator(s) shall perform its obligations and announce the result of the dispute.
In general, the result of the Arbitration is enforceable by law, however, a provision can be made in the Agreement, that in the event if any of the parties is not satisfied with the result from the Arbitration, shall have the right to take the result one step above or to the court or at any other institution shall be specified.
- Governing law
While reviewing the arguments and determining the result of the dispute the governing law can totally turn the result of the Arbitration into something other than anticipated as the Arbitration procedural law can be very different from the governing law in an Agreement.
Defining the Language (the principal method of human communication’) of Arbitration will also be beneficial for the parties. It clarifies the common language which shall be followed in the Agreement, to study the arguments of the parties and to declare the result understandable to the parties in dispute.
Whether in the dispute or not, the parties and the Arbitrator shall always maintain Confidentiality, or the principal characteristic of the Arbitration will not be met.
Consequences of not having an Arbitration Clause
In the absence of an Arbitration clause, parties will have to approach the court to resolve the dispute. Around the world, there are already numerous civil, criminal, and commercial issues pending in the court which remain unresolved due to the procedural limitations of the courts.
In today’s globalized business world, organizations are spreading their businesses across every other country, if the Arbitration clause is not present in the Agreement or it is poorly drafted the consequences can be devastating for the organizations. Such organizations will have to undergo lawsuits or litigations of every other country to resolve their disputes. The laws that governs arbitration in India are;
- Indian Contracts Act, 1872;
- Arbitration and Conciliation Act, 1996.
Arbitration is a key dispute resolution method to resolve any commercial disputes as the parties do not have to approach the court which saves time and money, and further can save the business relationship between the parties. In Arbitration, parties in dispute settle their arguments by accepting the decision made by a neutral third party in accordance with the facts and arguments provided to them by the parties involved in the transaction.
While drafting the Arbitration clause, if any of the aforementioned essentials are missed, a dispute may occur. It is important to discuss beforehand which details are to be chosen and followed and which are not. Therefore, it is important that parties must discuss and include such clauses in the Agreement.
Furthermore, it is recommended that while drafting the Arbitration clause, the nature of the Agreement, work scope, work location, registered offices of the parties, the amount of the Agreement, etc. all shall be thoroughly thought over.
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