DRAFTING EFFECTIVE ARBITRATION CLAUSES

By Evans Monari Tuesday, November 19, 2019
  • SHARE THIS ARTICLE

1. Introduction to arbitration and arbitration agreements

Arbitration (the resolution of disputes outside the courts) has the advantage of being private and quicker than it would be to resolve matters in court. Distinct features of arbitration are that the arbitration awards are binding and enforceable in court, ensuring that the protection offered by a court is still present with arbitration. An arbitration agreement may be formed before a dispute arises or even after it has arisen.

Notably, arbitration clauses only serve to limit the jurisdiction of the courts and do not entirely oust it. The development of arbitration in Kenya has witnessed interesting emerging issues, most prominently, constitutional questions arising out of commercial relationships. We see this, for example, in the case Bia Tosha Distributors Limited vs. Kenya Breweries Limited & 3 others [2016] eKLR whereby the court held that the amount paid by the Petitioner to acquire a ‘goodwill’ over certain distribution routes or areas of the Respondents’ products can be defined as ‘property’ held by the Petitioner and, as such, protected under Article 40 of the Constitution.

2. Factors to consider when choosing to include an arbitration clause in an agreement

  1. Confidentiality of the subject matter and the partiesDrafting effective Arbitration Clauses

Arbitral proceedings are not public, where sensitive matters are the subject of a dispute then arbitration offers a preferential alternative to litigation.

  1. Different party nationalities

This may influence the venue, seat and language of the arbitration in the event of a dispute.

  1. Nature of the contract: expertise, consumer agreements

This may influence the qualifications and expertise required of any potential arbitrators and should be provided for in the arbitration clause.

  1. Urgency of the matter: dedicated arbitrator, award finality

Arbitral proceedings can be conducted very swiftly and the award is final and binding. This means a matter may be decisively dealt with in a relatively short period of time.

  1. Need for interim relief: exclusive jurisdiction in foreign court

Any interim reliefs sought in the course of arbitration proceedings will be the subject for consideration by the courts of the seat of arbitration, therefore one should be aware of the prevailing practice in the jurisdiction of the chosen seat of arbitration.

3. Components of an arbitration clause

  1. Institutional and ad hoc arbitration

There are two types of arbitration that parties can choose from to resolve disputes under their contract – institutional or ad hoc.

Institutional arbitration is simply an arbitration that is administered by a recognized arbitral institution, an example of which is the Singapore International Arbitration Centre (SIAC). An institution such as the SIAC has its own rules and is responsible for arranging the appointment of the arbitral tribunal and the administration of the arbitration.

Ad hoc arbitration refers to arbitration that is not administered by an institution and requires the parties to make their own arrangements for the selection of the arbitral tribunal.

  1. Arbitral tribunal

In most arbitrations, the arbitral tribunal will comprise of either one or three arbitrators. Where the parties have agreed on institutional arbitration, the rules of the institution will usually contain default provisions governing the number of arbitrators in the event that the parties have not covered this in the contract and cannot agree on the same.

  1. Procedural rules

Most arbitral institutions issue rules governing the appointment of the tribunal and the procedure for the arbitration. In many cases the procedural rules will give the tribunal ample discretion to determine the manner and timing of the various procedural steps in the arbitration such as, the filing of pleadings, the exchange of documents and witness evidence as well as the scheduling of hearings.

In an ad hoc arbitration, it is up to the parties to agree on the procedural rules that will apply.  In such cases, the parties can agree to make their own rules, or adopt internationally recognized rules such as the UNCITRAL Rules.

  1. Venue

The venue of the arbitration is the physical location where the arbitration hearing will take place.

  1. Seat

Out of all the components of an arbitration clause, the seat is the one aspect which always causes the most confusion. Put simply, the seat of an arbitration is the "legal place" of the arbitration. It is important because it determines:

    1. the procedural law governing the arbitration;
    2. which court has supervision over the arbitration; and
    3. the "nationality" of the award.

While the seat and the venue of an arbitration will often be in the same country, this is not always the case and is not a mandatory requirement. This means that hearings will be held in the venue of arbitration while the seat determines the procedural law of the arbitration as well as which courts will have supervision over the arbitration and award (for the purposes of enforcing the award).

  1. Language

The language of the arbitration covers all aspects of the proceeding including the parties' pleadings, the presentation of documentary and oral evidence and the award itself.  This is an important aspect to determine, particularly where the parties do not share a common language.

Examples of Model Arbitral Clauses

ICC Clause

"All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules."

And additions of the below if possible:

"All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with the said Rules."

Also consider adding:

"The third arbitrator, who shall act as president of the arbitral tribunal, shall be jointly nominated by [the other two arbitrators/the parties] within [30] days of the [confirmation/appointment] of the second arbitrator. If the president of the arbitral tribunal is not nominated within this time period, the Court shall appoint such arbitrator."]

LCIA Clause

"Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.

  1. The number of arbitrators shall be [one/three].
  2. The seat, or legal place, of arbitration shall be [City and/or Country].
  3. The language to be used in the arbitral proceedings shall be [insert language].
  4. The governing law of the contract shall be the substantive law of [insert jurisdiction].

4. Conclusion

  1. When in doubt, institutional arbitration is best. Choose an institution with a good track record for efficient administration and the appointment of competent tribunals.
  2. For institutional arbitration, use the arbitration clause recommended by the institution. These can be modified easily to change the seat, venue, language or number of arbitrators.
  3. Always keep it simple. Complex clauses lead to uncertainty, which lead to disputes and which result in delay and additional costs to the parties.
  4. Choose a convenient venue. It does not have to be the same place as the seat although it is more convenient to have the seat and venue in the same place.
  5. The enforcement of the arbitral award should be the primary consideration in analysing most factors in the arbitration clause.