Arbitration clauses – how to get them right
Shourav Lahiri considers further some key pitfalls which can arise when drafting an arbitration clause, including the seat of arbitration (Part 2)
In the last issue, we some discussed key pitfalls when drafting arbitration clauses. In the second part of the article, this month, let us consider further some key pitfalls which can arise when drafting an arbitration clause, including, amongst other things, the seat of arbitration, appointing the arbitrator and preparation for arbitration.
How many arbitrators?
Under the Arbitration and Conciliation Act 1996 parties are free to decide the number of arbitrators used as long as it is not an even number. If the parties do not agree, the default position is a sole arbitrator.
However, generally most contractors seem to prefer to use three arbitrators. They feel they will have some degree of control (or favour) if they can choose at least one arbitrator who ‘might see things their way’. But there are some practical issues to bear in mind when deciding on whether to go for one or three arbitrators.
Nationality of the parties – are both the parties to the contract domestic companies or from different nationalities? Contracts with parties of different nationalities may merit a three-member tribunal so that each party can choose an arbitrator of its own nationality (if it so wishes).
Complexity and value – looking at the substance of the contract, make a judgment as to whether it is more likely than not that a dispute will involve difficult technical or legal arguments. Or is the contract price very high, which would mean that the risk of an unpredictable tribunal or an arbitrary decision would have significant consequences? If so, appointing three arbitrators instead of one might be preferable to ensure you get a predictable and competent arbitral tribunal. A power station contract will require different considerations compared to a contract for a three storey apartment block. For the latter, a three member arbitral tribunal may be over the top.
The ‘Availability List’ – if the arbitration is to be carried out under the auspices of an institution (such as the ICC, SIAC, LCIA etc), it is worthwhile considering the reputation and availability of the arbitrators on the institution’s list. This can be relevant to both the choice of a single arbitrator (which the institution will usually make in the absence of agreement of the parties) and the choice of a Chairman of a three member tribunal if the party appointed arbitrators cannot agree on a choice. The better the ‘list’ of an institution, the safer it is to go with that institution even if choosing a single arbitrator.
Finally consider the impact a three member tribunal may have on the timing of the resolution of case. On one hand, more arbitrators means greater cost, difficulties in co-ordinating diaries, more copies of documentation and potentially more time to make an award. On the other hand it reduces the risk of an arbitrary decision. On a practical level, it increases the chances that someone will be available to deal with urgent applications – which, with a single member tribunal, can be difficult. So thought should be given before a decision is made on the number of arbitrators.
Who appoints the arbitrator(s)?
Single Arbitrators: If you are using ad-hoc rules (such as UNCITRAL), the practical approach is for parties to exchange a list of potential arbitrators with the other side and if there is a common name, parties are agreed. Or further lists are exchanged until agreement is reached. But there is always the risk that parties will not be able to agree, in which case, this may mean referral to the local Court for the appointment of the arbitrator. The position is ameliorated if institutional rules apply (such as ICC), but even in those instances, it would be better to specify (if possible, in the contract) certain characteristics for the arbitrator, for example, that he or she should be a quantity surveyor, lawyer or engineer.
Three Arbitrators: Generally each party will nominate their own representative but who will appoint the Chairman? It could be that the parties are to agree, or that party appointed arbitrators are to agree or maybe the institution is to appoint. Each option can have potentially different outcomes – so it is important to consider which process of appointment is most appropriate in your case.
What is the ‘seat’ of your arbitration?
The seat is the juridical ‘home’ of the arbitration. An arbitration award has the nationality of the seat of the arbitration and, for the purposes of enforcement of foreign arbitral awards under the New York Convention (1958), the seat can be quite important.
The choice of seat has an impact on the procedural and practical aspects of the arbitration. Consider practicalities such as the time by when an award is to be issued – the laws of some countries require an award to be issued within six months from the start of the arbitration; the ability for the tribunal to award interest on late payments (if the contract does not provide for it) and the ability to recover legal costs spent by a party. The law of the seat of your arbitration will have an effect on these issues.
Enforcement of the award will also be affected by the seat. Unless the country is party to the New York Convention, the courts will treat foreign awards with a lot of scrutiny. It is possible that the award has to be re-litigated in the country or maybe there are several hoops to be climbed through before the award can be enforced. The choice of seat can present a significant risk to the successful party (and opportunities to the unsuccessful party to avoid enforcement) and therefore needs to be thought through in advance to avoid difficulties, and expensive litigation, in the future.
Shourav Lahiri is a Partner in the international law firm Pinsent Masons LLP. He wishes to thank his colleague Ms Helen Turner for her assistance with this article. The author can be reached at firstname.lastname@example.org.