According to the definition of arbitration given by the WIPO, “Arbitration is a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court.”
Why is an arbitration clause important?
The freedom of choice of the parties is the guiding principle of arbitration, and its pinnacle is the arbitration agreement, through which both parties expressly waive the jurisdiction that may correspond to them, in order to submit disputes that may occur concerning a specific legal relationship to one or more arbitrators.
The arbitration agreement enforces both parties to comply with the provisions and prevents courts from learning about the disputes submitted for arbitration, provided that the arbitration agreement is valid and effective. To this end, it is vital that the wording of the arbitration agreement does not lead to confusion nor is it incoherent or ineffective, for instance, the submission of the parties to the jurisdiction of the judicial courts and to arbitration at the same time; not identifying properly the specific arbitration institution which the parties wish to administer the proceedings; or, when indicating specific arbitrators who, where applicable, cannot accept their appointment (be it due to lack of independence or fairness, or due to retirement, etc.).
In light of a pathological arbitration clause, the case may arise where one of the parties considers that the dispute should be submitted to arbitration and, on the other hand, the other party considers that the dispute should be submitted to court. In such cases, depending on the position of the claimant, the claim shall be submitted to an arbitration institution or before court. This could generate tedious disputes about the lack of jurisdiction of the arbitrators or judges, as the case may be, preventing a thorough assessment of the case and delaying the resolution of the dispute, in addition to entailing significant economic costs for the parties.
What elements are appropriate for including in an arbitration clause?
For the sake of avoiding pathological arbitration clauses, it is highly advisable to adopt the arbitration clause guide provided by the arbitration institution at issue if the option of arbitration managed by an arbitration institution is chosen (rather than ad hoc proceedings). Moreover, the inclusion of the following elements in the arbitration clause may contribute to the efficient management of the arbitration:
- Seat/place of arbitration
- Number of arbitrators (sole arbitrator or a panel of three)
- Method of appointment of arbitrators (in ad hoc arbitration, an appointing authority in default of party selection)
- Language of arbitration
- Rules of arbitration
- Substantive law governing the contract
- Finality of the award (“final and binding”)
Ultimately, what the arbitrator or, as the case may be, the Judge, should assess when one of the parties invokes or appeals its jurisdiction to learn about a dispute based on an arbitral agreement, is the real intention of the parties when providing their consent to the clause at issue.
Carla Villavicencio
Vilá Abogados
For more information, please contact:
6th May 2016
