The right to arbitrate does not arise automatically. You and the other party to your commercial agreement must proactively decide that disputes under the contract will be referred to arbitration. You make a choice to avoid court-based litigation. Normally the arbitration agreement will be contained in the overarching contractual arrangement. On occasion there may be a standalone arbitration agreement. While it may be convenient and tempting to adopt standard form arbitration clauses there is no substitute for carefully thinking about how you want the arbitration agreement to operate in practice and getting legal advice on terms that specifically meet your requirements.
As we will see below an arbitration clause that is unclear brings only uncertainty and can result in the very legal proceedings the arbitration agreement was designed to avoid n the first place. Nath Solicitors in London advises small and medium-sized business on arbitration agreements and how to use arbitration to resolve complex disputes. You can contact our director Shubha Nath on 44 (0) 203 983 8278 or get in touch with the firm online.
Arbitration Agreements: Getting The Essentials Right
Your legal advisers should discuss all aspects of the proposed agreement with you in detail. In our experience some of the situations when uncertainty can arise include:
- The parties do not properly consider what kind of disputes should be referred to arbitration and what type of disagreement should be resolved through the courts
- There’s inadequate consideration of how to resolve disputes when the contract involves multiple parties
- Lack of agreement over whether less formal ADR methods like mediation should be explored before arbitration
- No clear statement as to whether ad hoc or institutional arbitration should be used
- The chosen arbitral institution is not described clearly
- The location or ‘seat’ of the arbitration is unclear
- There is no specified number of arbitrators
A failure to get the key elements of your arbitration agreement right can be costly. Uncertain terms can lead to disputes in themselves. You may be forced into litigation to get a ruling on the meaning of the arbitration agreement thereby undermining the entire rationale for agreeing to arbitrate.
Unclear Agreement To Arbitrate: A Case Study
The 2014 English Commercial case of Kruppa v Benedetti involving a dispute over a shareholder agreement is a clear example of a poorly drafted arbitration clause that proved costly to the parties. Here is the clause that led to the dispute:
‘Governing law and jurisdiction
Laws of England and Wales. In the event of any dispute between the parties pursuant to this Agreement, the parties will endeavour to first resolve the matter through Swiss arbitration. Should a resolution not be forthcoming the courts of England shall have non-exclusive jurisdiction.’
In deciding that there was no agreement the judge found that the clause only amounted to a non-binding expression of a desire to ‘endeavour’ to resolve disputes through ‘Swiss arbitration’. The reference to Swiss arbitration added to the confused nature of the agreement because of the legal structure of Switzerland itself. As the judge explained:
‘Switzerland is divided into cantons; this would require a cantonal court to apply the provisions of Swiss law, but the clause does not give any cantonal court jurisdiction nor specify a cantonal seat.’
A similar reference to London arbitration is likely to be viewed as equally unclear given that there are several bodies in London that undertake commercial arbitration.
Comment
Where possible English courts will recognise the validity of arbitration agreements. The principle that parties should be free to agree contract terms (like arbitration clauses) is fundamental to our legal system. However sometimes – as in the case mentioned above – the flaws in an agreement are so glaring that courts have no choice but to rule that the clause as drafted cannot be viewed as a legally binding agreement to arbitrate.
Contact our Arbitration Lawyers
Arbitration remains an effective and popular method of ADR even in the context of geopolitical uncertainty and the fallout from Covid19. For advice on arbitration and other forms of ADR please contact Shubha Nath at Nath Solicitors on 44 (0) 203 983 8278 or complete our online contact form.
