Usually, arbitration clause is not paid much attention while drafting a contract and this lack luster attitude may eventually lead to regrettable situation involving higher risk and cost. A well thought out arbitration clause as to the bearing of each word contained therein will help in mitigating the risk. Following are the few key aspects that must be borne in mind while drafting an arbitration clause in a commercial contract.

  1. ARBITRATION CLAUSE TO BE INCLUDED OR NOT TO BE INCLUDED: The first and the foremost consideration is whether the arbitration clause is to be included in the contract or is it to be avoided. Sometimes, it may be better that the matter be referred directly to the Courts instead of going through the arbitration proceedings as it may be much costlier or time consuming. It is usually a settled law that if a contract contains the matter to be referred to arbitration then courts usually will like the parties to first exhaust the arbitration process before the matter can be brought before the courts.
  2. SCOPE OF ARBITRATION: The language of the arbitration clause should be such that there is no ambiguity as to the scope of the proceedings under the jurisdictional arbitration tribunal. It may not be a good idea to carve out certain aspects in a commercial contract while trying to cover only few aspects under the scope of arbitration proceedings as usually all aspects are interconnected, and this may not be acceptable to the arbitration tribunal.
  3. LANGUAGE OF THE ARBITRATION PROCEEDINGS: The language in which the proceedings must take place is an important aspect mainly when the parties to the contract are from different region and it is a matter of negotiation between the parties. Once agreed upon, then all written or oral submissions will take place in the agreed language and so it is advisable that the clause must mention the language in which one is comfortable in order to make proper submission and also it will save on translation cost later on.
  4. SEAT OF THE ARBITRATION: This aspect is very important as it must not be confused with Venue of Arbitration. The agreed seat of Arbitration will determine the procedural law to be applied to the proceedings and other interim relief and enforcement of the award. Usually, parties tend to agree on “neutral” seat but that should not be the only consideration while deciding on this factor. Different countries have different procedural law in relation to arbitration proceedings and enforceability of the award and this must be considered while deciding on the seat aspect.
  5. VENUE OF THE ARBITRATION: The Parties must agree upon the venue where physical attendance as regards to the proceedings is to take place so as to avoid inconvenience or cost associated with the same.
  6. GOVERNIG LAW: It is another important aspect of the arbitration clause as the choice must be the one of which you are usually aware of and this choice can have an important bearing on the outcome of the proceedings. Since arbitration clause in itself is a separate contract between the parties and so the parties may agree to apply well settled law while the performance may take place in some other jurisdiction and parties may belong to different jurisdictions. Absence of such aspect in the arbitration clause may lead to the tribunal adopting Governing Law in accordance with the seat of the arbitration or where substantial contract is performed, and this may lead to lengthy dispute.
  7. CHOICE OF RULES: The Parties must pay attention to the inclusion of procedural governing rules of an established arbitral institution such as ICC. Such inclusion may be advantageous as this would ensure that the institution shall administer the procedure being properly followed as laid down and the parties shall also be clear as the procedures to be followed which are well defined. The Parties may also agree upon such institution appointing the tribunal member. In case the Parties do not wish to be governed by the institution rules then they must agree upon the procedural aspect so as to avoid any question arising on this issue. The Parties may choose to be governed by ad-hoc procedural rules such as UNCITRAL rules.
  8. NUMBER AND APPOINTMENT OF ARBITRATORS: This aspect is important too and the parties must agree on the number of the arbitrators and the person appointing the arbitrator(s). The Parties may agree upon appointing a sole arbitrator or panel of three arbitrators. However, the parties must bear that the choice of the arbitrator must be such as it may not lead to biased appointment. The Parties may also agree to let the Governing Institution decide on the appointment of the arbitrators or may decide that each party to appoint one arbitrator and the two together then agree to appoint a third arbitrator. In case the Party requires that arbitrator must have some technical background as it may be relevant as regard the contract, then the Party can specify the technical background required for the arbitrator so that he may have better understanding of the technicalities involved in the contract.

It may be prudent that the Contract has multi-tier reconciliation and dispute resolution process set out such as that initially the Parties may decide to resolve the dispute amongst themselves through negotiation and then escalate it to reconciliation and mediation and then finally to Arbitration.

Although each clause in the contract can have a bearing on the final outcome in case of a dispute but nevertheless, Arbitration clause and the way it is drafted will certainly have a bearing on the outcome and the procedure and the cost involved if dispute does arise between the Parties.