• Avinder Laroya

5 Reasons Why You Should Draft An Arbitration Clause Using English Law Into Your Commercial Contract

Updated: Feb 8, 2021

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

4. Confidentiality

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 [2020] 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.

4. Confidentiality

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 [1998] 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