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How your company should draft dispute resolution clauses

BY JACOB MUTEVEDZI

It is difficult for parties to a contract to foretell what future disputes will be about. There is no knowing which side of the dispute your company will be when a dispute arises. Your company may not even know who the other party to the dispute will be because interests may be ceded, companies may be acquired or merged and, in the case of investor-state agreements, governments may change. Consequently, dispute resolution clauses should be drafted in the simplest and clearest terms possible. Companies should avoid drafting dispute resolution clauses without taking advice from their international arbitration lawyers.

A properly drafted dispute resolution clause will save parties lots of time and money. This article explores the components that your company should include or consider when drafting dispute resolution clauses in international contracts.

Broad form clause

A dispute resolution clause should be crafted in such a way that it will cover all disputes that may arise from the contract. Always resist the temptation to narrow a clause down to exclude certain kinds of disputes. Such an approach is imprudent because it can yield disputes over the scope of the clause thus potentially increasing costs.

Broad clauses come in various forms depending on the draftsman. The clause can be couched in the following simple terms: “Any dispute arising out of or relating to . . .”.

A dispute can be defined in the following broad language: “Dispute means any dispute, controversy, or claim (of any and every kind or type, whether based on contract, delict, statute, regulation, or otherwise) arising out of, relating to, or connected with this Agreement, or the operations carried out under this Agreement, including but not limited to any dispute concerning the existence, validity, interpretation, performance, breach, or termination of this Agreement.” Parties must avoid multiple definitions for the term “Dispute”. It must only be defined once to avoid conflicting definitions that will cause confusion when a dispute arises.

Arbitration rules

In choosing the procedural framework of an arbitral process, parties have two basic options. They can either adopt the arbitration rules of an institution which will administer the arbitration for them or employ non-administered rules for an ad hoc arbitration. Whatever method your company prefers, it is generally preferable to settle for modern international arbitration rules. It is not advisable to craft a procedural framework from scratch or use the arbitration law at the place of arbitration. You should choose rules of established and reputable arbitral institutions such as the International Chamber of Commerce (ICC) or the Cairo Regional Centre for International Commercial Arbitration (CRCICA). Before you agree to use an institution’s rules, you must ensure that your legal counsel is familiar with the institution, its rules, case management skills, quality of arbitral panels, its default appointment mechanisms and fee structure.

Arbitrator appointment

The outcome of a dispute relies, for the most part, on the arbitrator or panel of arbitrators you appoint. Therefore, when drafting your dispute resolution clauses there are numerous things that you should consider. The first issue is the number of arbitrators. It is self-evidently unwise to appoint more than one arbitrator to deal with unsophisticated disputes of low value. Conversely, three member arbitral tribunals are recommended for complex and high value disputes. The more the arbitrators, the greater the cost and the longer it will take for them to render an award. I usually advise companies to maintain flexibility by providing for both a single arbitrator and a three arbitrator panel and use the value of the dispute as a determinant of the number of arbitrators required.

The appointment of arbitrators can either be the preserve of the parties or be left to an arbitral institution. Experience has taught me that parties usually prefer to retain control of the appointment process because the choice of arbitrators has a considerable impact on the outcome of their dispute. The dispute resolution clause can achieve this by providing that each party will appoint an arbitrator and that those two arbitrators will appoint the chair of the tribunal. Where the arbitrators cannot agree on a chair, the designated institution can act as the defaulting appointer. If the dispute resolution clause says nothing about the appointment process the default appointment mechanism in the chosen arbitration rules will kick in. You must avoid naming a specific person as arbitrator because if he or she dies, is incapacitated, or declines to serve as arbitrator, it is an instant default in the appointment process.

 

Seat of arbitration

Choosing the seat of the arbitration is one of the key decisions to make in the negotiation of a dispute resolution clause. The seat of the arbitration normally determines the procedural law of the arbitration, including enforcement of and challenges to the award. You should select a seat in a jurisdiction that has a mature arbitration law that your lawyer is familiar with; for example the UNCITRAL model law. The country of your chosen seat of arbitration should preferably be one that has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. A good seat is one whose courts have a proven track record of supporting international arbitration. These are the courts that have supervisory jurisdiction over the arbitration. They will deal with jurisdictional challenges, handle applications for interim measures, and applications to set aside arbitral awards.

Language of arbitration

While this is important, it is not ordinarily a critical aspect of the dispute resolution clause. If the parties speak different languages, it is prudent to clarify the language of the proceedings. For instance, where your company uses English but the other party speaks French. Failure to choose a language for the proceedings can potentially result in a disagreement over the applicable language. This could subsequently give rise to a dispute over the pool of arbitrators to choose from. Left unmanaged, this issue could lead to the use of multiple languages in the pleadings and hearings resulting in higher costs.

  • Jacob Mutevedzi is a commercial lawyer and arbitration practitioner. He can be contacted on jmutevedzi@gmail.com, on Twitter @jmutevedzi_ADR and on +263775987784. He writes in his personal capacity.

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