5 Reasons Why You Should Draft An Arbitration Clause Using English Law Into Your Commercial Contract
Updated: Jul 30, 2020
Who should read this?
This article will look into the considerations to be taken before including an arbitration clause in your contract. Arbitration is an effective forum for the resolution of commercial disputes and should be considered by parties who want to use a voluntary, confidential, flexible procedure that is legally binding with the benefit of international enforcement.
Arbitration is a voluntary alternative dispute resolution (ADR) procedure to court proceedings. The procedure is the preferred procedure for international commercial contracts as it is an adversarial procedure and any award made is binding with limited right to appeal.
Using English law as the seat and governing law of the arbitration provides a degree of reliability, neutrality and impartiality of the English Courts and the Arbitration Act 1996. The UK is also a signatory to the New York Convention 1958. which provides the recognition and enforcement of foreign arbitral awards.
The 2019 annual casework report from the London Court of International Arbitration (“LCIA”) confirmed that the LCIA had an outstanding year in 2019 with a record number of 406 cases referred to the LCIA and the first quarter of 2020 the LCIA has seen a spike of new cases with the expectation this will continue to increase due to COVID-19.
The 5 key advantages of arbitration covered within this article include:
1. Flexibility of procedure
2. Choice of arbitrator
3. Choice of jurisdiction and law
5. International enforcement
1. Flexibility of the procedure
Arbitration offers procedural flexibility allowing the parties to tailor the procedure to particular types of technical dispute with choice of legal forum, governing law, seat, language, and institutional rules are all features that attract commercial parties to arbitration.
The key feature of arbitration is that the procedure allows the parties to have greater influence and involvement over the procedure than court litigation. For instance, parties can decide upon the structure of evidence taking.
Parties are also able to create ad-hoc procedures or opt for institutional rules such as LCIA or ICC rules and adopt the procedures to comply with the procedural timetable. In litigation procedural deadlines are more rigid and the courts are more likely to penalise parties who do not follow the CPR protocols or procedural deadlines.
2. Choice of Arbitrator
Selecting an arbitrator is one of the most crucial decisions a party will take and should be carefully considered when drafting an arbitration clause within a commercial agreement.
One of the features of Arbitration is the freedom for the parties in selecting arbitrators that will resolve their dispute, contrary to court litigation where there is no opportunity to select the Judge. In the UK Judges are usually appointed by the Independent judicial Appointments Commission for a fixed term.
Parties have the opportunity to choose a sole arbitrator or panel of arbitrators with particular technical expertise, level of commercial experience in a particular field, language and nationality. Consideration should be given to the type of dispute the arbitral tribunal will be resolving and whether a sole arbitrator is sufficient compared to a panel of usually three arbitrators.
The arbitration clause should have a defined procedure for the appointment of arbitrators also and take into account who selects the arbitrators, for example are they jointly appointed by the parties or each party picks one arbitrator with the chair being appointed by the arbitration institution for example, should be considered.
Arbitrators generally have expertise in a particular area of the law and have discretion to adopt the procedure to the specific circumstances of the case. Arbitrators have wide powers to obtain factual and legal evidence to assist in the making of the final binding award.
Once the arbitrators are appointed the arbitral tribunal is constituted to be able to progress the arbitration.
The role of a Commercial Arbitrator is to make a final binding award on behalf of the involved parties, the result of which (the arbitral award) is final and legally binding. As a result, how the arbitration clause is drafted to choose the arbitrator(s) is key in constituting the tribunal and resolving the dispute through arbitration.
3. Choice of law and jurisdiction
A key feature of arbitration is the ability for the parties to consider the governing law of the arbitration which can be different to the main agreement. Careful consideration should be taken of the doctrine of separability when drafting the choice of law, as often such clauses can become pathological and require the intervention of the courts to determine the terms of the arbitration clause from the main agreement.
There are four choice of law issues that should be determined;
· the substantive law applicable to the merits of the case
· the applicable law to the arbitration agreement
· procedural law applicable to arbitrary proceedings
· conflict of law issues when determining each of the above within an agreement
An example of a pathological clause and the issues that can arise can be seen in a recent ruling in the Court of Appeal in London where it was suggested that the parties to an arbitration agreement made an express choice of governing law for their agreement even if there was no express provision in the agreement Kabab-Ji S.A.L v Kout Food Group  EWCA Civ 6.
In this case the issue that was before the Court of Appeal was firstly, in relation to the governing law of the arbitration agreement which provided for arbitration in Paris, but the main agreement was expressly governed by English law. Secondly, whether the respondent became a party to the main agreement and/or arbitration agreement in light of the “no oral modification” provisions in the main contract.
Without going into the facts of the case or the legal considerations which can be found here. The arbitration tribunal had determined that the governing law of the arbitration agreement was French law, and that English law governed the agreement. However, the High Court and ultimately the Court of Appeal decided that English law governed the arbitration agreement taking into consideration the terms of the agreement.
The above case highlights the issues and additional time, energy and costs that can occur due to the drafting of a pathological clause to ensure the correct governing law is being applied by the arbitral tribunal.
Arbitration proceedings are held in private, the English Arbitration Act 1996 is silent on confidentiality, there are three rules:
1. Arbitration proceedings must be held in private
2. There is implied confidentiality during the arbitration
3. Confidentiality is subject to exceptions that were determined in the Court of Appeal in Ali Shipping Corporation v Shipyard Trogir  CLC 566 namely, court orders, consent of the parties, public interest and reasonable necessity.
The English courts seek to protect confidentiality as long it does not conflict with information that is inherently confidential and information that is protected by implied duty of confidentiality.
There is no uniformity on the scope of confidentiality amongst countries or international arbitral institutions, however, parties are free to decide the degree of confidentiality they desire, careful consideration should be observed while drafting the arbitration clause to ensure confidentiality of the parties interests and dealings.
Further issues to consider when drafting an arbitration clause should be confidentiality of all documents exchanged and steps to avoid disclosure, obligations of third parties such as statements, tribunal deliberations, witnesses and final award by the tribunal for example.
5. International enforcement
Arbitral awards are recognised internationally through the New York Convention. For an award to be recognised under the Arbitration Act 1996, section 52(1) specifies that the parties are free to agree on the form of the award.
The award must be:
· In writing
· Signed by all arbitrators
· Contain the reasoning for it
· The seat of the arbitration clearly stated
· The date of the award (section 52 (3) to (5)
The Arbitration Act 1996 regulates and gives effect to the award in the UK, recognition of the award made by a territory of a state other than the UK which is a party to the New York Convention will be recognised as binding on the parties to the arbitration.
If a party has obtained an arbitral award in another jurisdiction and has assets to enforce in the UK, the arbitral award will be recognised due to the UK being a signatory to the New York Convention 1958. The enforcement of foreign arbitral awards are governed under the New York Convention and through the jurisdiction courts, in this instance the English Courts.
With regard to enforcement, the court will give permission for judgement to be entered in term of the award and therefore enable an award to be enforced in the same manner as an English Court judgement.
Recognition and enforcement of an award that is undertaken by a territory that is a signatory to the New York Convention is mandatory, as of June 2020 there are 164 States which include 160 of the 193 United Nations member states that are signatories to the New York Convention.
The New York Convention 1958 is one of the most successful international treaties for international trade and the cornerstone of international arbitration.
The arbitration procedure provides parties an opportunity to tailor the procedure to their requirements, allowing either certain types of disputes to be dealt with by arbitration or all disputes relating to the agreement. Arbitration allows parties in theory to save time, costs and adjust the procedural process to quick resolution.
The arbitration procedure also provides parties with legal certainty through the New York Convention to recognise and enforce arbitral awards internationally, this provision is an important aspect to the success of arbitration in cross border disputes.
An experienced lawyer can assist with drafting a suitable arbitration clause and help parties to identify legal considerations during negotiations, quickly assisting to design the arbitration clause and procedure to ensure a cost effective and timely resolution of a dispute.
Careful consideration should be made when drafting an Arbitration clause to ensure there is clarity of the process and choice of law, taking into account the principles of the doctrine of separability and whether the arbitration should follow ad-hoc or institutional procedures.
Serenity Law LLP’s co-founding partner, Avinder Laroya, is a member of the Chartered Institute of Arbitrators (MCIArb), has knowledge of arbitral institutional rules such as LCIA, ICC, ICSID and has advised clients based in multi-jurisdictions, including the USA, Asia and Europe. Book a consultation with Avinder Laroya by clicking here to discuss your requirements.
Who are we?
Serenity Law LLP are a digital law firm, supporting businesses with their commercial legal needs throughout the UK and further afield. When working with corporate clients on dispute resolution matters, the team at Serenity Law aim provide practical advice and guidance covering all eventualities in your industry sector. Offering additional services, such as Mediation, Arbitration and court litigation, allow Ms. Laroya and her team to provide an all-round commercial law service.
To discuss your Arbitration requirements, contact our team on 0800 019 7773 or book a free consultation here.