Drafting an Effective Arbitration Clause.

An Arbitration Clause, in a corporate and commercial contract, explicitly outlines that parties must recourse to the arbitration process to resolve a dispute that has occurred in relation to the agreement. This ensures, if either party breaches this clause and initiates a court proceeding, the court shall refer the parties to Arbitration u/s 8 of the Arbitration and Conciliation Act, 1996.

What type of Contracts have an Arbitration Clause?

Any contract, which includes a transaction or provides certain rights or imposes obligations over parties, can include an arbitration clause. These are a few examples:

• License Agreement;
• Employment Agreement;
• Joint Venture Agreement;
• Share Holder Agreement etc.

What are its Contents?

While drafting this clause one must be aware of its essentials which regulates its scope, validity and makes it binding upon the parties. Let's dive into the essentials of an effective arbitration clause:

• Type of Disputes Referred : The clause stipulates the nature of disputes which is to be resolved through Arbitration. Since there can be 'n' number of disputes arising out of a contract, to ensure a wider scope, mostly the clause starts from; "Any and all the disputes arising out of or relating to this Agreement will be settled by final and binding Arbitration".

• Appointment of Arbitrators : It is pertinent to note that, the arbitrators has to be odd in numbers as given u/s 10 of the Act. In case, no particular number is determined the arbitral tribunal will be consisting of a sole arbitrator. upon failure of parties to appoint, Court can appoint arbitral tribunal upon receipt of an application u/s 11 moved by either of the parties to the agreement.

• Qualification and Fee : The clause can also specify about the qualification criteria for appointing arbitrator so as to ensure that the arbitrator has the requisite knowledge and experience with respect to the subject matter of the dispute. further, it also determines fees of arbitrator.

• Seat for Arbitration : The seat of Arbitration refers to the substantive and procedural law applicable to arbitration agreement. It is different from place of arbitration which is limited to indicating the geographical location for arbitration proceeding.

• Arbitration Institution : Sometimes, parties may suggest a particular institution which will regulate the arbitration procedure from appointment of arbitrator to the declaration of award. for example, "Arbitration shall be in accordance with the rules of the International chambers of Commerce".

• Language for proceeding : The clause also suggests for the language that is to be used in arbitration proceeding, it may state "All arbitration proceeding shall be conducted in English language".

• Cost & Expenses : It further provides for how parties are agreeing to finance the cost and expenses arising with respect of arbitration proceeding which includes but not limited to the fee of arbitrators. Hence, the clause may suggest "The cost and expenses of the arbitration shall be borne equally by each party to the dispute".

These are the few checklist to comply with when drafting an arbitration clause, since it underscores its enforcement and effectiveness.

Sample Clause

Let's draft a sample arbitration clause, bearing in mind the pointers mentioned above.

Any dispute arising from or in connection to this contract shall be referred to and resolved by arbitration under_________ (Institutional rules). The arbitration shall be conducted by a mutually appointed sole arbitrator. The venue of arbitration shall be______ and the court of _____ shall have an exclusive jurisdiction for any applications arising out of the arbitration. The contract shall be governed by the laws of_____ as applicable.        

This clause is a standard version of an arbitration clause.

Conclusion

It is critical to borne in mind, that mastering the art of drafting requires consistent efforts and a keen interest in learning, but to begin with, it is crucial to analyse the checklist of every clauses and their sample drafts. As it shapes one's understanding, while boosting their confidence that they can draft better than what they have read.

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