The anatomy of an arbitration agreement

Introduction

Arbitration is an inherently flexible mechanism intended to streamline the dispute resolution process to meet the parties’ specific needs. Yet, despite free and readily available resources on the drafting of arbitration agreements (see our December 2021 article, How to draft an arbitration agreement), courts are all too frequently asked to resolve disputes over standard aspects of an arbitration clause, and this resort to litigation effectively eliminates the benefits the parties sought to achieve through an arbitration agreement in the first place.

To quote Justice Steel in Thompson General Hospital v CSL Hospital Services Ltd. 30 BLR (2d) 280, 112 Man R (2d) 211 “if the parties, having the freedom to craft a process that perfectly suits the context of the parties and their situation, choose to relinquish this power by the use of a standard form or ‘boilerplate’ clause, they have only themselves or more properly, their solicitors to blame.” This article dissects the ‘standard’ components of arbitration agreements and provides examples of where poor drafting has resulted in unnecessary litigation.

Scope

The scope of the arbitration agreement is intended to outline which disputes must be referred to arbitration. The scope may be broad, covering for example “any and all disputes relating to or touching upon the breach, performance or interpretation” of an agreement. Conversely, the scope may be much narrower, applying only to a specific aspect of an agreement, such as disputes over invoicing or budget approvals.

Specifying exactly what is and is not covered by the arbitration agreement is essential, requiring careful attention and precise wording. The importance of precision increases where the parties seek to introduce multiple dispute resolution mechanisms into one agreement. In Lovelock v Exportles [1968] 1 Lloyd's Rep. 163, the arbitration agreement provided that “any dispute and/or claim” was to be submitted to arbitration in England and “any other dispute” to arbitration in Moscow. Lord Denning commented that “it is beyond the wit of man…to say which dispute comes within which part of the clause”. It was so vague that it was “devoid of meaning”, effectively frustrating the intentions of the parties by requiring any dispute to instead be decided by the court.

Seat

In international arbitrations, it is common for arbitration agreements to identify the seat of the arbitration as a different jurisdiction than the actual location where the arbitration is to take place. The seat of the arbitration determines the procedural law that will apply to practical aspects of the arbitration, for example supervision and support of the arbitration and interim remedies.

In Roger Shashoua, Rodemadan Holdings Limited, Stancroft Trust Limited v Mukesh Sharma [2009] EWHC 957 (Comm), an arbitration agreement provided that the venue of the arbitration was London, but was silent on the seat. The English Court found that the seat was London, stating that “[for] a choice of place not to be given effect as a choice of seat, there will need to be clear evidence that the parties…agreed to choose another seat for the arbitration.” The Indian Supreme Court (where relief was sought by one of the parties) agreed.

Governing law

While it may be assumed that an arbitration agreement contained within a main agreement will be subject to the same governing law of the main agreement, it is not always clear-cut. This is especially the case where the parties are from different jurisdictions, the main agreement is performed in another jurisdiction, or the seat of the arbitration is in a different jurisdiction to the governing law of the main agreement.

In Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638, Lord Justice Moore-Bick explained that “although one may start from the assumption that the parties intended the same law to govern the whole of the contract, including the arbitration agreement,” other factors, such as the seat of the arbitration, may lead to the conclusion that this was not their intention. Specifying in advance the law of both the main agreement and the arbitration agreement prevents the possibility of a dispute over which law is to apply.

Choice of arbitral institution

Selecting the appropriate arbitral institution, and thereby the appropriate procedural rules, requires an understanding of the various institutional rules. This is important for a number of reasons including the costs associated with each institution, whether the arbitration is to be confidential, any expedited procedures that the parties may wish to benefit from, and the quality-control the various institutions exercise over decisions made under their supervision. (See our May 2022 article, Choosing the right arbitral rules).

It is also essential to understand which rules each arbitral institution can and will apply. In the Dubai International Financial Centre (DIFC) case of Limeo Investment & Real Estate LLC v Landia Educational Services S.A.L [2019] DIFC ARB 012, the parties had agreed that the “dispute shall be finally settled in accordance with the rules of the London Court of International Arbitration [LCIA]” and that the arbitration “shall take place in the LCIA Arbitration Centre in Dubai International Centre, in Dubai, the UAE”. A dispute arose as to which procedural rules applied, as (at the time) the DIFC-LCIA was a related but distinct arbitral institution to the LCIA. The DIFC Court found that the rules of the DIFC-LCIA applied, stating that: “if the choice of rules and centre provided for by the Arbitration Agreement pertain to one and the same institution, it follows that the rules which are the analogue of the DIFC-LCIA Arbitration Centre can only be those of the DIFC-LCIA.”

Arbitrators

Choosing the number, characteristics and mechanism for appointment of the arbitral tribunal will depend on the nature, complexity, and value of potential disputes. Ensuring that the arbitration agreement is clear on these issues can prevent an unnecessary visit to court to determine who should be appointed. Being too prescriptive as to characteristics in advance may limit the parties’ options for appropriate arbitrators later on.

Failing to provide for the selection of arbitrators at all will inevitably result in Court intervention, increased costs and delay for the parties. In Sherwin-Williams v Walls Alive, 2000 ABQB 811, the arbitration agreement was silent on the appointment of the tribunal and, in the absence of any guidance in the agreement itself, the Court appointed a retired judge, preferring legal experience over the accounting expert put forward by one of the parties.

In Broken Hill City Council v Unique Urban Built Pty Ltd [2018] NSWSC 825 the arbitration agreement provided that the “President of the Australasian Dispute Centre” was to nominate the arbitrator. It transpired that the Australasian Dispute Centre did not exist, but the Court salvaged the agreement, though at the expense of increased costs and delay, by finding that since parties did intend for disputes to be arbitrated, the agreement was operative despite the oversight of the appointing authority and the Court would appoint the arbitrator instead.

Multi-tiered dispute resolution

While every effort should be taken by parties to avoid litigating disputes, creating prerequisites to arbitration through multi-tiered dispute resolution procedures should be articulated clearly to avoid uncertainty as to the compulsory nature of the steps.

In Emirates Trading Agency v Prime Mineral Exports Private [2014] EWHC 2104 (Comm), the agreement provided that “the parties shall first seek to resolve the dispute by friendly discussion”, and that if no solution could be reached for a continuous period of four weeks, the dispute could be referred to arbitration. The Court found that the use of the word “shall” indicated that the obligation was mandatory, thus making four-week long “friendly discussions” a condition precedent to arbitration. Findings like this can have a significant impact on a party’s rights, particularly where the limitation period for a claim is nearing expiry.

Conclusion

To quote Justice Feasby in Singh v Modgill, 2022 ABQB 369, arbitration “is not some lesser form of litigation than that being conducted in the courts” … unless that is what the parties bargained for.” To avoid unintended bargains, parties are advised to consider the drafting of arbitration agreements carefully, with a view to mitigating uncertainty and providing clear answers to foreseeable issues.