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Planning for successful arbitration

When drawing up new international contracts, Nicole Smith explains how to make adequate provision for the use of arbitration in the event of a dispute.

When drawing up new international contracts, have you made adequate provision for the use of arbitration in the event of a dispute?

Arbitration is a process of going to an independent third party to have them make a binding decision on your dispute. It is often the preferred dispute resolution process where the parties to a contract come from different countries or cultures and either they don't trust each other's courts or they are not prepared to allow the other party a "home advantage" in any dispute that may arise.

Whilst it is usually good advice to keep it short and simple, there are sometimes very good reasons for adding bells and whistles. But make sure that you have the right bells and the right whistles and as few of each as possible. Nicole Smith outlines the key considerations:

Where?

Your arbitration clause must name the seat (place) of arbitration. In international proceedings, this should be in a country that is a party to the 1958 New York Convention on enforcement of arbitral awards. The general practice is to name a city rather than a country as this is particularly important in countries that have different arbitration laws in each state.

Who?

Your arbitration clause must say who is to appoint your arbitrator(s). If you do not and the parties do not agree, it will generally be the courts of the seat that appoint the tribunal which can be a long and painful process.

You should also state how many arbitrators you want. One would usually suffice, but you may want to provide for three in a more complex or high value dispute.

You could also set out any particular qualifications or expertise that you want the arbitrator to have. However, be careful with this, as you may think that any dispute under your contract for the leasing of engines will be about engines, but it may end up being about accounting issues or damage causation.

You also need to be careful that your requirements do not discriminate under the Equality Act 2010. In the case of Nurdin Jivraj v Sadruddin Hashwani [2010] EWCA Civ 712, an arbitration agreement was held to be invalid as it required the appointment of respected members of the Ismaili community and holders of high office within the community. The decision is being appealed to the Supreme Court.

How?

You should decide whether you want the proceedings to be ad hoc or institutional.

An institution will generally have a set of arbitration rules which you adopt. The institution will appoint the tribunal, deal with any challenges to the tribunal and generally deal with paying the tribunal once the institution has received the funds from the parties. Options include:

If you decide to have ad hoc proceedings, you can still provide for a particular set of rules to be used, for example the United Nations Commission on International Trade Law (UNCITRAL) rules or you can leave the procedure to be determined by the tribunal, once they are appointed. Setting out the entire procedure in your arbitration clause is not recommended.

It is generally a good idea to say what the language of the proceedings will be, particularly if there could be any doubt.

If your contract or project involves more than two parties you could provide for the addition of parties to the proceedings (joinder) or the consolidation of separate proceedings. This is a very complex area. For example, you need to decide at what point an application for joinder will be too late, which tribunal remains in place where proceedings are consolidated and you need to provide for the tribunal to consent to the joinder or consolidation and it is therefore best to get specialist advice.

You could also provide for stages and steps on the way to arbitration, such as negotiation and mediation. Multi-tiered dispute resolution clauses were popular for many years, based on the argument that one party would not want to show weakness by proposing an alternative dispute resolution (ADR) procedure once a dispute had arisen. But given the prevalence of ADR nowadays; that reasoning no longer holds true. If you do want to include steps and stages, make sure that the time limits for moving from one stage to the next are clear.

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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