Drafting Effective Arbitration Clauses – Avoiding Pathological Clauses

By: Oyetola Muyiwa Atoyebi SAN, FCIArb (UK)

INTRODUCTION

Arbitration, as a method for resolving disputes, has proven to be a valuable and efficient alternative to lengthy court proceedings. The possibility of obtaining a resolution within a relatively short timeframe, compared to regular courts, is an attractive incentive for many parties involved in legal conflicts. However, the success of arbitration heavily depends on the precise and clear drafting of arbitration clauses in contracts or agreements that govern the parties’ relationships.

WHAT ARE PATHOLOGICAL ARBITRATION CLAUSES?

A pathological arbitration clause refers to a provision or term in a contract or agreement that establishes the use of arbitration as a method for dispute resolution but, due to defective or problematic wording, ends up causing difficulties or obstacles in carrying out the arbitration process in an appropriate and effective manner. These clauses can be incoherent, ambiguous, or inapplicable, resulting in an inadequate arbitration process for efficiently resolving disputes between the parties.

Impact of Pathological Arbitration Clauses

Pathological arbitration clauses undermine the primary purpose of arbitration: the expeditious resolution of conflicts. Instead of providing an agile alternative to courts, inadequate wording unjustly discourages efforts to implement an alternative means of dispute resolution. The presence of obscure, imprecise, or erroneous clauses, such as the designation of non-existent arbitral institutions, leads to additional disputes concerning the validity of the clause and the arbitration process, unnecessarily prolonging the proceedings.

COMMON PATHOLOGIES AND WHY THEY ARE PROBLEMATIC (THE DON’TS)

In-house counsel should be aware of several common defects:

1. Unavailable Forum or Non-Existent Institution/Rules: This is a frequent pathology where the arbitration agreement refers to an arbitral institution or set of rules that either never existed, no longer exists, or is otherwise inaccessible.
2. Non-Existing Substantive Law: Clauses that attempt to specify a non-existent substantive law to govern the arbitration proceeding can also render the agreement problematic.
3. Ambiguous or Non-Mandatory Arbitration Proceedings (Optional Clauses): This category includes clauses that are unclear about the mandatory nature of arbitration. Examples include contracts that feature both an arbitration clause and an ordinary forum selection clause, single clauses providing for both arbitration and court jurisdiction, or optional arbitration clauses. While some courts interpret these to mean that once one of the parties initiates arbitration, the other is bound, such ambiguity can invite unnecessary litigation over the clause’s validity.
4. Bare or Blank Clauses: These clauses merely state that disputes will be resolved through arbitration but omit crucial details such as the seat of arbitration, language, applicable law, or the mechanism for appointing arbitrators.
5. Internally Contradictory Clauses: These provisions contain conflicting elements, such as selecting two different arbitral seats, two different institutions, or appearing to provide for both arbitration and litigation for the same disputes. Courts generally attempt to enforce these by deleting superfluous parts or reconciling inconsistent terms through liberal interpretation, prioritising the parties’ predominant intention to arbitrate.

ESSENTIAL DO’S FOR IN-HOUSE COUNSEL

More generally, to avoid the risks of pathological clauses, in-house counsel should implement a proactive and meticulous approach to drafting:

1. Do Draft with Care, Not Haste: Avoid treating dispute resolution clauses as midnight clauses. Sufficient time and resources should be dedicated to their drafting.
2. Do Express a Clear Intent to Arbitrate: Explicitly state the parties’ unequivocal intention to submit all disputes arising from the contract to final and binding arbitration.
3. Do Specify Essential Elements: Clearly define the arbitral seat (legal place of arbitration), chosen arbitral institution, applicable arbitration rules, language of arbitration, and the number of arbitrators. While national law may provide default mechanisms, specifying these details ensures predictability and efficiency.
4. Do Verify the Existence and Accessibility of Chosen Elements: Before finalising, confirm that the named arbitral institution, rules, and any specific arbitrators (if named) exist and are accessible.
5. Do Ensure Internal Consistency: Carefully review the entire contract to ensure there are no contradictions within the arbitration clause itself or with other dispute resolution provisions.
6. Do Avoid Hybrid Arbitration Clauses: Combining administrative bodies and rules from different institutions often leads to procedural complications and potential challenges to awards, undermining the very efficiency arbitration seeks to provide.

By adhering to these simple principles, in-house counsel can significantly reduce the risk of dispute resolution clauses becoming pathological and ensuring that any disagreements can be resolved efficiently and effectively through arbitration.

APPROACH OF COURTS IN DEALING WITH DEFECTIVE ARBITRATION AGREEMENTS

The idea behind drafting an arbitration agreement is to avoid resorting to litigation. Unfortunately, in disputes under agreements containing defective arbitration clauses, the parties, especially the party invoking arbitration, have no other choice but to approach courts to get the matter referred to arbitration, as the party lacks the inherent ability to force the other side to proceed with the arbitration.

Generally, there are three approaches available to the courts,

1. Courts hold the arbitration clause to be invalid or unenforceable for vagueness.
2. Courts sever the defective part from the part which provides for the resolution of disputes through arbitration and enforce the valid part of the arbitration clause,
3. Courts rewrite the defective part of the arbitration clause by supplying a meaning that is most reasonable in the context of the arbitration clause.

It is important to note that the duty of a court is to give effect to the intention of the parties and not rewrite their contracts. How then do we determine the intention of parties in a matter? For the purpose of ascertaining the intention of the parties, regard must be had to the terms of the contract, the conduct of the parties, and the circumstances of the case.

The case of MEKWUENYE V. IMOUKHUEDE is the Nigerian case noted for pathological clauses. Clause 3(c) of the Tenancy Agreement between the parties provided inter alia that: “…any conflict and/or disagreement arising out of these presents… shall be referred to a sole Arbitrator that shall be appointed by the President of the Chartered Institute of Arbitrators, London, Nigeria Chapter…“. The argument was that “the Chartered Institute of Arbitrators, London, Nigeria Chapter” is non-existent, making the referral to a non-existent body unenforceable. The Supreme Court held that parties are bound by their contract. However, where such terms or expressions will not be absurd or is unambiguous, the intention of the parties is read into the contract.

The Supreme Court placed reliance on AGBULE V. WARRI REFINERY & PETROCHEMICAL CO LTD, wherein (per OGUNBIYI, JSC) it stoutly held and nailed the matter thus: It goes without saying therefore, that a defendant/respondent who did not protest against the name used and in fact filed processes using such interchangeably cannot now be heard to complain at this stage. This is because he is deemed to have waived his right and is therefore estopped from contending the contrary, as rightly submitted by the learned appellant’s counsel. The wrong use of the name did not overreach or put the respondent to any form of disdain in the absence of any earlier complaint thereof. The use of the name in my view is, at best a misnomer and which did not occasion any negative effect.

It is also important to note that the basis for the validity of an Arbitration clause is voluntariness. This means that where any of the parties can prove that it is unaware of such term or was deceived or coerced into consenting to the clause, it becomes invalid and litigation can be explored without priority to Arbitration.

A “STANDARD” ARBITRATION CLAUSE

While it is essential to ensure that your Arbitration Clause meets all the necessary requirements, there is really no one-fits-all kind of Arbitration Clause. The danger with sticking to the template characterized as “standard” is that it might not adequately address the interests and intentions of the parties in that particular contract. Bespoke Arbitration Clauses tailored to the subject of the contract and the nature of the agreement are more advisable.

To adequately tailor the Arbitration Clause to best benefit the parties of a contract, the parties and the draftsman must be careful to ensure that the clause is not defective or open to unnecessary contentions. The following questions should therefore be considered:

What is the nature of the contract?

What do parties intend to achieve with the Clause?

What disputes would be resolved through Arbitration?

Are there other Alternative Dispute Resolution Methods that should first be explored? Parties might be interested in Conciliation or Mediation before Arbitration, and this must be clearly stated.

How many Arbitrators are to be appointed and by whom?

What Venue is to be used?

What language would be used?

What rules should guide the award of Cost?

CONSEQUENCES OF DEFECTIVE ARBITRATION AGREEMENTS

The consequences include –

1. Such clauses defeat the purpose of resorting to arbitration
2. Considerable wastage of time, money and efforts in fighting litigation in court, sometimes up to the highest court
3. Forum shopping is the initiation of court proceedings in any jurisdiction other than the one chosen by the parties
4. Possibility of multiple proceedings in different jurisdictions
5. A corollary of multiple proceedings may lead to inconsistent decisions on the enforceability of the arbitration agreement.

CONCLUSION

In Conclusion, Arbitration is a valuable tool for dispute resolution, but its effectiveness hinges on well-drafted and clear arbitration clauses. Avoiding pathological clauses is crucial to ensure the expeditious and fair nature of the arbitration process. The guidance of experienced legal professionals is key to crafting robust and effective arbitration agreements that enable parties to resolve their disputes fairly, swiftly, and with full confidence in the process. By anticipating and carefully drafting arbitration clauses in contracts, parties can ensure they reap the benefits and agility that arbitration offers in resolving their disputes.