LatinLawyer arbitration column

Strategic decisions in drafting arbitration clauses for international contracts Could your arbitration clauses be putting your client at a disadvantage when contracts are contested? In the first of a monthly column exploring international arbitration in Latin America, Doak Bishop, Craig Miles and Roberto Aguirre Luzi, of King & Spalding,

Doak Bishop Craig Miles Roberto Aguirre Luzi discuss how to draft an enforceable arbitration clause and which provisions to include

he international arbitration process First, the arbitration agreement must be in • the phrase ‘all disputes’ encompasses all types often begins before a dispute ever arises writing; oral agreements are not enforceable. A of controversies, without exception; T– with the parties’ decision to include an written arbitration agreement may consist of a • the phrase ‘in connection with’ generally arbitration clause in their contract. This is the first separate arbitration agreement or an arbitral clause creates a broad-form clause that will cover strategic decision made by the parties in resolving contained in a contract. non-contractual claims such as tort and fraud their dispute, and perhaps the most important. Second, the parties to the arbitration clause in the inducement; and Thus, the parties should seize the opportunity must have the capacity to agree to arbitrate. One • the phrase ‘finally settled’ indicates that the to take control of their arbitration clauses when of the few grounds in the New York and Panama parties intend the arbitrators’ ruling to be final drafting an agreement. Conventions for vacating an award are when the and binding. Parties include arbitration clauses in their parties are under some incapacity (pursuant to the contracts with the aim of solving future disputes law applicable to them), or when the arbitration But note that this clause leaves certain strategic in a timely and cost-effective manner. A carelessly agreement is invalid under the governing law to decisions for the institution or arbitrators to drafted arbitration agreement, however, may which the parties agreed (or, in the absence of an decide once the arbitration is initiated: the become a pathological clause (ie, one that is agreement on the governing law, under the law of venue, the number of arbitrators, the language not enforceable or is ambiguous, giving rise to the country where the award is made). of the proceeding, and the law to govern the expensive and time-consuming court challenges). Third, the type of disputes concerned must parties’ obligations. If the parties wish to control In drafting the arbitration clause, certain be arbitrable. Under a given nation’s view of the outcome of these decisions, they should mandatory requirements must be included. public order or public policy, a particular species provide for them in the arbitral clause. Therefore, Beyond these provisions, however, are a multitude of controversy may be properly arbitrated, but while almost certainly enforceable, institutional of additional, optional provisions that may be there may be others that are not arbitrable (eg, sample clauses provide the bare minimum in an included at the discretion of the parties. labour law). arbitration clause. A word of caution: there is no such thing Fourth, although it is not part of the as a single ‘model’ or ‘all-purpose’ arbitration conventions’ requirements, parties sometimes Types of arbitration clauses clause that is ideal for all contracts. Rather, each provide that a certain action or event must Arbitration clauses can be classified into three arbitration clause must be carefully tailored to occur before arbitration. For example, mediation, categories: basic, general and complex clauses. the specific circumstances of the contract and the negotiations or the lack of jurisdiction of a Basic clauses are those that include only the requirements of the parties, taking into account specific court could be conditions precedent to most basic provisions – those that are essential to the likely types of disputes that may arise, the the filing of an arbitration. A common problem a viable arbitration agreement. Most institutional needs of the parties, and the applicable laws. with these conditions is when it is unclear model clauses are basic clauses. Unfortunately, because the arbitration clause whether the provision is merely preferable before General clauses are perhaps the most is often one of the last contractual provisions the arbitration or whether it is required to initiate common type of arbitral provisions for substantial negotiated, it is often simply inserted at the last a proceeding. transactions. They include certain optional minute with the parties merely using form clauses. provisions beyond those in a basic clause, designed Failing to include essential provisions or failing Institutional sample clauses to solve particular problems (eg, providing for the to tailor the arbitration clause to the exigencies Each of the leading arbitral organisations venue, language, governing law, negotiation or of the specific contract can result in inefficiency, provides a sample arbitration clause for inclusion mediation stages, etc). General clauses are typically unnecessary conflict and increased expense once a in international contracts. For example, the used when some, but not all, potential provisions dispute arises. But when in doubt, a simple clause International Chamber of Commerce (ICC) are needed, or when the parties are unwilling to like the model institutional clauses may be the suggests the following clause: risk deviating from institutional rules or violating best decision. All disputes arising out of or in connection mandatory rules of the applicable law and they with the present contract shall be finally do not have the time or resources to research the Enforceability of arbitration clauses settled under the Rules of Arbitration of the issue. Examples of these clauses may be found in The main objective of a drafter should be to International Chamber of Commerce by one the energy industry in joint operating, drilling, draw up an enforceable arbitration clause. The or more arbitrators appointed in accordance natural gas supply and power plant construction New York and Panama Conventions both list the with the said Rules. agreements. requirements for an arbitral agreement in order to Complex clauses include some more unusual be enforceable. Both conventions include similar This clause contains the three key aspects of an provisions in addition those which are generally requirements for enforcing arbitration agreements. arbitral clause: accepted. These clauses must be carefully tailored www.LatinLawyer.com 43 arbitration column LatinLawyer to prevent inconsistencies and meticulously Some years ago, a model clause was used by a substantive law is not chosen by the parties, the researched to prevent provisions that might client in a different contract. The client had made law of the place of arbitration may be applied invalidate the clause in a given jurisdiction. a couple of what it considered small changes to by the arbitrators. Finally, parties should also Beyond those included in general clauses, it, but it made the clause unworkable. The lesson consider cost issues in the selection of the place of provisions that may be included in a complex is that in experienced hands, advanced clauses can arbitration. clause include: (i) confidentiality, (ii) discovery, solve problems, but if you are not expert in them, (iii) multi-party arbitration, (iv) consolidation, (v) be cautious and stick with the tried-and-true Language split clauses requiring litigation of some issues and formulae of institutional model clauses. Drafters should strive to agree upon a language arbitration of others, (vi) expert determination, that allows them flexibility during the selection (vii) arbitrability, (viii) waivers of appeals or Strategic provisions of arbitrators without unnecessarily increasing the consent to appeals, and (ix) authorisation to adapt Drafters should be aware that certain strategic costs for translations. When parties do not share the contract or fill gaps, among others. decisions are often being made at the drafting the same language, drafters often tend to select stage, long before a dispute arises, which can English as the language for arbitration. Although Principles for drafting arbitration clauses substantially impact a future arbitration. Among selecting a language like English permits a wider Regardless of the type of arbitration clause, certain the most important for international contracts are selection of arbitrators, if the parties are not from drafting principles will help prevent the failure of the following: English speaking countries or the transaction and the clause. First, parties should avoid provisions evidence is not in English, then the cost of the that offend applicable substantive or procedural The ICC has arbitration could be increased. law, particularly any mandatory law. This includes the procedural law of the seat of the arbitration refused to Confidentiality and the laws of the likely countries of the award’s Because the rules of most arbitral institutions do enforcement. For example, French courts have administer not require the parties themselves to maintain the invalidated arbitration clauses that permitted a confidentiality of arbitral proceedings, the parties broader appeal of the award to the courts than arbitrations may wish to specifically address the confidentiality was allowed by French law. of the proceeding itself, the documents used or The second principle is similar: drafters should when the parties’ exchanged in the arbitration, and the arbitral avoid altering arbitral rules fundamental to the award. operation of the administering institution. Some agreement ICC rules – and virtually all of the American Discovery Arbitration Association (AAA) international rules modifies certain Whereas discovery in litigation in the US is – may be modified by the parties’ agreement. But generally broad and highly regulated, discovery the ICC has refused to administer arbitrations rules that the in the international context is generally narrower when the parties’ agreement modifies certain rules and more flexible. Because the rules of arbitral that the ICC considers fundamental to the proper ICC considers institutions do not address the issue of discovery functioning of its arbitrations. in any detail, parties may wish to address A third principle is to include all essential fundamental the availability and scope of discovery in the provisions and avoid provisions that could result in arbitration clause. a pathological clause. For example: • the clause should expressly state that the Arbitral institutions Exclusion of punitive and consequential arbitration is final and binding; These differ not only in terms of cost, but also damages • the clause should state the correct name of on relevant strategic issues such as multi-party Because some courts (such as the US Supreme the institution designated to administer the arbitration, confidentiality, arbitrator and witness Court) allow arbitral tribunals to award punitive arbitration; interviews, and privileged information. A cautious damages unless forbidden to do so by the parties’ • the parties should generally avoid naming drafter should know the prominent procedural agreement, the parties may wish to include a a particular person as arbitrator in their differences among the institutional rules. In provision expressly prohibiting this. The AAA agreement; another column, we will explore the differences international rules do prevent such damages. • the parties should not be too specific when between the main arbitration rules, and the pros imposing qualifications for the arbitrators; and cons of selecting ad hoc arbitration instead of The drafting of the arbitration clause and related • the parties should ensure that any authority institutional rules like ICC or AAA. provisions can have a profound impact on the named to act as appointing authority will eventual resolution of disputes. The parties should agree to fulfil its mandate; Place of arbitration therefore take great care in considering, among • the parties should ensure that the procedure Selecting the right place of arbitration is a very other issues, the nature of disputes to be subject to adopted is clear, workable and not confused or important strategic issue. The venue should be arbitration, the manner in which such arbitrations conflicting; and sited in a New York or Panama Convention should be conducted, and the appealability of • if a condition precedent to arbitration is country in order to obtain the advantage of arbitration awards. Although there is no one- adopted, either a deadline for the occurrence enforceability as a matter of treaty rights. It size-fits-all or ‘model’ arbitration clause, the of the condition or the means of satisfying it should also be in a country in which the courts foregoing principles apply to the drafting of all should be clearly stated. will support and not obstruct the arbitral process. arbitration clauses. In most circumstances, parties The courts of the place of arbitration control any negotiating such a contract should consult with an Fourth, when in doubt, a cautious drafter should procedural disputes and are the proper forum to experienced international arbitration attorney. pick a basic clause from a well-known institution. determine the issue of the judicial revision of Next month’s column will discuss how to Why? Because small changes to a good clause the award, and the arbitral law of the place of strategise an international arbitration, from the can sometimes turn it into a pathological clause. arbitration usually applies to procedure. Also, if a first client call to filing a demand.

44 Volume 5 • Issue 9