HOW CAN WE DRAFT A VALID AND EFFECTIVE ARBITRATION CLAUSE IN INTERNATIONAL COMMERCIAL ARBITRATION?

Arbitration is supposed to be a simple method of resolving disputes between the parties by appointing a third person as their Arbitrator or a Private Judge whose judgment, both the parties agree to trust and are bound by without invoking the jurisdiction of the traditional courts.? However, such a simple method is likely to bring in complications and further disputes if the agreement is vague, lacks essential ingredients and is contrary to the established rules and practices followed in different jurisdictions and the international commercial domain.

This article is an attempt to simplify the essentials of a valid arbitration clause in the context of international commercial arbitration.

INTRODUCTION

Arbitration is the preferred method of resolving international disputes involving states, individuals and corporations.? The increased globalization of world trade and the operations of transnational corporations resulted in harmonized arbitration practices by specialized international arbitration practitioners who speak a common procedural language, whether they practice in England, Switzerland, Nigeria, Singapore, India, Brazil or elsewhere.

For an arbitration agreement to be valid and effective, it has to be drafted comprehensively using standard forms of agreement followed by UNCITRAL Model Law or other arbitral institutions such as ICC, ICDR, LCIA and SIAC among others. The arbitration agreement is the outcome of the consent of the parties to refer any dispute arising out of or in connection with such a defined legal relationship entered into and between them.

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VALID AND EFFECTIVE ARBITRATION AGREEMENT

A valid and effective arbitration agreement should be in conformity with Article II (3) and Article V (a) New York Convention, 1958 (Convention on the Recognition and Enforcement of Foreign Arbitral Awards) (hereinafter referred to as NYC) and Article 7 UNCITRAL Model Law, 1985 as amended in 2006 (hereinafter referred to as ML). The following are the criteria of an effective arbitration agreement:

(i)????????????? The arbitration agreement should be in writing and in consonance with Article II (2) of NYC and Article 7 (2) of ML.

(ii)???????????? It should deal with all or any existing or future disputes in connection with a defined legal relationship whether contractual or not,

(iii)?????????? It should concern a matter capable of settlement by arbitration (arbitrability),

(iv)?????????? The parties to this agreement should have legal capacity under the applicable law,

(v)??????????? The agreement should be valid under the national laws of both parties and should not be repugnant to any of the national laws of the parties.

(vi)?????????? The manner in which the composition of the tribunal is to be established

(vii)???????? Rules by which the arbitration will be conducted if it is an ad-hoc arbitration.? If it is an institutional arbitration, the name of such arbitration and its rules are to be mentioned in the arbitration clause.

(viii)??????? Should specify the Language of the arbitration

(ix)?????????? Jurisdiction which governs the procedural issues in the arbitration;

(x)??????????? Jurisdiction which will govern the merits of the dispute or issues in the arbitration

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LEGAL CAPACITY OF THE PARTIES TO AN ARBITRATION AGREEMENT

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The legal capacity of the parties is vital in an arbitration agreement. In the case of natural persons, the capacity of an individual to enter into a contract within the state of his or her place of domicile and residence will depend upon the law of the state.?? However, in the case of international contracts, it may become necessary to look into the law of the contract.? For example, a person of 20 years or above may well have the capacity to enter into an agreement under his or her own state law, but not under the law governing the transaction in question.? To make the point more clear, a person who belongs to an EU member state enters into a contract with an Indian citizen.? If there is a difference of law of the EU member state and Indian law with regard to the eligibility or capacity of such person to enter into an agreement, it has to be taken into consideration while drafting the arbitration clause.

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In the case of juridical persons, the capacity to enter into a contract is governed primarily by its constitution and the law of its place of incorporation. A corporation is required to act through its directors and officers in accordance with its constitution (articles of association) and its own governing law. The laws of some states may restrict a corporation from initiating arbitration in certain circumstances or as a whole.? In Belgium, public law entities were at one time prohibited from concluding arbitration agreements.? This prohibition has now been abolished, however, some still remain.???

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Recently in India, , the Union Finance Ministry has recommended restricting arbitration clauses in government contracts to disputes of less than Rs 10 crore.? A few days back, the Karnataka government withdrew its circular on compulsory arbitration clause for government contracts and tenders on the ground that it was resulting in a huge financial burden on the State exchequer.?? These kinds of restrictions will incapacitate the corporates to enter into arbitration agreements with parties.

EFFECT OF THIRD PARTIES TO THE ARBITRATION AGREEMENT

Party consent is a prerequisite for international arbitration.? Such consent is evident in the agreement to arbitrate which generally concluded ‘in writing’, the requirement of a signed agreement in writing, however, does not altogether exclude the possibility that an arbitration agreement concluded in proper form between two or more parties might also bind other parties.? Third parties to an arbitration agreement have been held to be bound by such an agreement in a variety of ways viz, (1) by operation of the ‘group of companies doctrine’ that an arbitration agreement in certain circumstances, extended to another member of the same group of companies and (2) by operation of general rules of private law – principally those governing assignment, agency and succession.?

Third party may also enforce rights conferred under the terms of a contract in certain circumstances where a specific law authorizes so.? For example, the English Contracts (Rights of Third Parties) Act 1999 provides that a third party may enforce a contractual term where the contract expressly confers such benefit on that third party.??

SEPARABILITY, ACTS AS A SAVIOUR!

Separability means that the arbitration clause in a contract is considered to be separate from the main contract of which it forms part and, as such, survives the termination of that contract. UNCITRAL Rules, Articles 16(1) of the ML provides that “the arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.? For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.? A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause”

In the Gosset case (Cass. Civ. 1ere, 7 May 1963 (Dalloz, 1963) 545, the French Cour de Cassation recognized the doctrine of separability in very broad terms “In international arbitration, the agreement to arbitrate, whether concluded separately or included in the contract to which it relates, is always save in exceptional circumstances….completely autonomous in law, which excludes the possibility of it being affected by the possible invalidity of the main contract”

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CONCLUSION

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If an arbitration agreement is hit by defects, it shall be termed as null and void and becomes incapable of being performed. The principal defects found in arbitration clauses are those of inconsistency, uncertainty and inoperability.? The inoperability of an arbitration clause is mentioned in Article II (3) of the New York Convention. ?When the arbitration clause suffers from one or more of these defects, it is likely to be raised when a party takes action in a national court in relation to a dispute and the defendant seeks a stay of the proceedings on the basis of the existence of the arbitration clause.? In such an event, the application for stay may be opposed on the basis that the arbitration agreement was “inoperative or incapable of being performed”

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Needless to emphasise the importance of a valid and effective arbitration agreement to sail through smoothly if a dispute arises at any time.

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References :? (1) UNCITRAL Model Law 2006

?????????????????????? (2) New York Convention, 1958

??????? ???????????????(3) UNCITRAL Model Law Rules 2021

?????????????????????? (4) Redfern & Hunter on International Arbitration (6th Edn)