International Arbitration Clauses

Unlike litigation, international arbitration relies on consent and must be specifically agreed to by parties. Without this, an arbitral tribunal will have no jurisdiction over the parties or any dispute that arises between them. Parties can enter into an agreement referring a particular dispute to arbitration once it has arisen (known as a "submission agreement"). However, party co-operation may be limited at that point. Therefore, more commonly, parties include an arbitration clause in their underlying commercial contract, by which they agree that all disputes that may in future arise, will be resolved by arbitration. 

This Quickguide addresses the issues to bear in mind when drafting international arbitration clauses. For an introduction to the key features and principles of arbitration, which underlie some of the drafting choices to be made, see our Quickguide, Introduction to International Arbitration.

Note that some jurisdictions draw a distinction between "international arbitration" and "domestic arbitration". References in this Quickguide to "arbitration" are to international commercial arbitration (although much of this guide is equally applicable to domestic arbitration).

Reasons to choose arbitration

Parties often choose arbitration as a means to resolve international, commercial disputes because:

• arbitral awards are widely enforceable internationally under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 1958 (the New York Convention), often more easily than national court judgments;
• they can have the dispute heard in a forum which they perceive to be more neutral than a national court;
• they can select arbitrators with expertise in the relevant industry or subject-matter of the underlying commercial contract;
• arbitration offers greater procedural flexibility compared with court proceedings;
• arbitral awards have greater finality than court judgments, as there are usually only limited rights to challenge awards, compared to broader rights of appeal before national courts; and
• the proceedings are generally private and confidential.

However, sometimes parties prefer court litigation, including because:

• the jurisdiction of arbitral tribunals is limited by the need for party consent, meaning that it is not generally possible to obtain orders affecting third parties, which are not party to the agreement to arbitrate;
• litigation may, in some jurisdictions, be quicker and cheaper than international arbitration (although rights of appeal may impact this); or
• they wish to seek publicity for a claim or set a precedent.

How to draft an arbitration clause

The first step is for parties to consider their priorities and what they want to achieve. As with all contractual clauses, to introduce a "standard" arbitration clause into all contracts can be unhelpful, since there is no such thing as a "standard" contract, nor a "standard" dispute. Rather, the parties should consider what disputes may arise in the context of their particular transaction or relationship, and, in that context, what the clause ought to address. 

Consideration for the parties include:

• the nature and value of potential disputes (monetary and otherwise);
• the complexity of potential claims, including whether these are likely to involve technical matters that would benefit from particular decision-maker expertise;
• the speed with which a decision is required (for example, whether there is an ongoing, or contract to be performed, meaning that swift resolution should be prioritised);
• the location of the relevant parties and (for the purposes of enforcement) their assets;
• the language(s) spoken by the parties and in which documentation is held, and what language should be used in the arbitration;
• whether the resolution of the dispute is likely to require written and/or oral evidence;
• multi-party issues, in particular whether there are more than two parties to the contract or involved in the same project, or are there likely to be several related disputes taking place at once;
• whether pre-arbitration alternative dispute resolution (ADR) procedures, such as mediation, are desirable; and
• whether any particular types of dispute (such as completion account disputes) are likely that would be more suited to expert determination, rather than arbitration.

Some of these issues give rise to distinct drafting points in their own right, while others inform decisions on, for example, which arbitral rules should be chosen. Often, parties cannot predict accurately the types of dispute that may arise and how their adversaries might react to them. They may have a broad idea, however, and, by considering the potential risks, can tailor their arbitration mechanism to the likely types of dispute. For example, if your counterparty is a state-owned entity from a country in which such entities are known to take every opportunity to delay proceedings, an arbitration administered by a well-known international arbitral institution is likely to be preferable to an ad hoc arbitration.

Key issues to address in an arbitration clause

When drafting any arbitration clause, parties should, at a minimum:

• Ensure there is an unequivocal submission to arbitration, with a broad and clear definition of the scope of disputes covered;
• Decide whether ad hoc or institutional arbitration is preferable, and which arbitral rules should be used;
• Agree where the arbitration will be seated;
• Specify the number of arbitrators, how will they be appointed and any specific qualifications required; and
• Expressly state which law will govern their arbitration clause and what the procedural language of the arbitration will be.

Clear submission to arbitration

It is critical that the parties' arbitration agreement contains an unequivocal submission to arbitration for the final and binding determination of disputes that arise. While the courts of arbitration-friendly jurisdictions may uphold and enforce ambiguously worded clauses, a party seeking to avoid arbitration could seek to exploit ambiguities. To avoid uncertainty and increased costs, as well as the fundamental risk of the arbitration agreement being found not to be binding, the clause should be clear and categorical in the parties' submission to arbitration, using mandatory language.

The clause should also clearly define the scope of disputes that the parties agree to submit to arbitration. Generally speaking, this should be as broad as possible (using drafting such as "all disputes and controversies arising under, in relation to or in connection with this agreement (including any non-contractual obligations)"). This reduces the risk of different disputes ending up in different forums, with the potential for increased costs and complexity, as well as inconsistent decisions.

While it is possible, and may in some circumstances be desirable, to carve out a particular category of disputes from the arbitration clause, and agree that these should be resolved in another forum (for example, litigation before the courts of a specified jurisdiction), this should be done with caution and precise drafting is needed.

Procedural rules for the arbitration

A fundamental choice that the parties will need to make is whether to select institutional or ad hoc arbitration. Once that decision is made, they will need to decide which procedural rules to adopt. If they have chosen institutional arbitration, this will mean selecting the rules of a specific arbitration institution or, in the case of ad hoc arbitration, deciding whether to rely solely on the default rules in the national law of their chosen seat of arbitration or to apply a set of non-institutional rules. 

Institutional arbitration

When parties choose institutional arbitration, they agree to conduct their arbitration under the procedural rules of a particular arbitral institution. The institution will administer, and supervise the conduct of any arbitration commenced under the parties' arbitration agreement. A fee will be payable for this service, usually calculated by reference to the amount in dispute. 

The institution's precise role in administering the arbitration will vary according to its rules, but will typically involve overseeing the appointment of arbitrators and resolving any challenges to them, determining the tribunal's fees, managing the taking of deposits and making of payments to the arbitrators, and assisting with logistics for hearings. Some institutions also perform more substantive roles, such as scrutinising draft awards to ensure compliance with the rules and enforceability.

Ad hoc arbitration

Ad hoc arbitration, on the other hand, is arbitration which the parties and the tribunal manage themselves. It is conducted under rules adopted for the purpose of the specific arbitration, without the involvement or support of any arbitral institution. The parties can draw up the arbitral rules themselves (not recommended), leave the rules entirely to the discretion of the arbitrators or, as is more common, adopt rules specially written for ad hoc arbitration, for example, the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules.¹ They then conduct the arbitration in conjunction with the tribunal, once it is appointed. 

Matters such as appointment of arbitrators and associated issues are managed by the parties, arbitrators' fees are negotiated directly with the arbitrators and paid directly by the parties, and the parties must arrange all logistics for the hearing. There is no supervision or scrutiny of awards, and procedural mechanisms such as the appointment of emergency arbitrators to determine applications for urgent interim relief, which feature in most sophisticated institutional arbitration rules, are lacking. 

Institutional arbitration is often preferred

A survey of international arbitration users found that 79% of the arbitrations they were involved in over a five-year period (2010-2015) were institutional arbitrations.² More recent surveys continue to show a strong preference for institutional rules, over ad hoc arbitration.³

This is discussed further in our Quickguide, International arbitration: Which institution?. In brief, however, institutional arbitration is generally preferable because: 

• nstitutional arbitration rules are designed to regulate the proceedings comprehensively from beginning to end, and have generally been tested and revised over successive editions, taking account of an institution's extensive experience across numerous cases;
• institutions are better suited to cater for contingencies that might arise, even where (as sometimes happens) the respondent fails to co-operate or refuses to participate at all;
• the institution will assume administrative responsibility for the arbitration, which takes a burden off the tribunal and may serve to streamline proceedings;
• fees and costs are typically transparent and, to a degree, predictable; and
• some jurisdictions only recognise institutional arbitration, meaning that, depending where the arbitration is taking place or the award may need to be enforced, ad hoc arbitration may be unsuitable.

By contrast, users of ad hoc arbitration may prefer the greater flexibility it affords and to remove the additional costs and layer of bureaucracy created by institutional arbitration.⁴ Ad hoc arbitration is widely used by industry practice in certain sectors, for example, the shipping and commodities sectors.

Choosing the arbitral institution

Where the parties opt for institutional arbitration, they must then answer the question: which institution? There are many to choose from. As a general rule, only institutions with a proven track record should be selected and newly formed institutions, which lack experience and whose rules are relatively untested, are best avoided. 

Increasingly, the leading institutions and their rules are converging, offering similar processes, with few unique distinguishing features. It follows that parties often look to more subjective factors in deciding which institution to use.⁵ 

Some of the most popular institutions worldwide are:

• the International Court of Arbitration at the International Chamber of Commerce (ICC), in Paris;
• the Singapore International Arbitration Centre (SIAC);
• the Hong Kong International Arbitration Centre (HKIAC);
• the London Court of International Arbitration (LCIA); and
• the China International Economic and Trade Arbitration Commission (CIETAC).⁶

The factors to consider when choosing an institution are discussed in our Quickguide, International arbitration: Which institution?, which also contains a table comparing the key features of the above institutions' rules.

Specify the legal place or seat of arbitration

The legal place or "seat" of the arbitration is one of the most important matters to specify. The seat anchors an arbitration to a legal jurisdiction, giving the proceedings and the resulting award a nationality. 

The seat of an arbitration is typically expressed as a city, however, it is the jurisdiction in which that city is located that is key: that jurisdiction's arbitration law will form the fundamental procedural law of the arbitration. This affects a range of matters, including:

• which courts will supervise, and be able to exercise powers in support of, the arbitration, including the availability of interim remedies (such as freezing or anti-suit injunctions);
• the mandatory rules that may be imposed, in addition to the institutional or ad hoc rules chosen by the parties;
• whether the dispute is "arbitrable" in that country, that is, whether the subject-matter is capable of settlement by arbitration or something which national law reserves exclusive jurisdiction over to the national courts (such as matters relating to crime);
• the possibility of the arbitral award being challenged or appealed, and the courts that will determine those challenges; and
• the nationality of the arbitral award for enforcement purposes.

The parties must consider both the jurisdiction's legislation relating to arbitration, and the attitude of its national courts towards arbitration generally.

Legislative framework

Most countries have legislation that governs arbitrations seated in their territory. Most such legislation prioritises party autonomy, meaning that it provides the minimum procedures and safeguards to ensure a fair and effective arbitration process, plus default rules, which will apply unless the parties agree otherwise. Adopting a set of institutional rules will amount to an agreement otherwise, and replace the non-mandatory provisions of the arbitration law. 

Many countries' national arbitration laws are based on the UNCITRAL Model Law on International Commercial Arbitration (Model Law). More than 120 jurisdictions have adopted arbitration legislation based on, or influenced by, the Model Law, which is intended to even out disparities between national laws and promote a common standard for arbitral practice.⁷

Generally speaking, parties can rely on legislation based upon the Model Law (although some countries have introduced amendments that depart significantly from the Model Law, while the courts of others may not always interpret and apply the Model Law provisions in a consistent and predictable manner). However, there are some jurisdictions, including England, France and Switzerland, which have not adopted the Model Law as their arbitration legislation but are widely recognised and respected as arbitration-friendly seats. 

Unless you are familiar already with arbitrating in a particular seat, advice should be taken before agreeing to it.

Approach of the courts

A jurisdiction's national arbitration law will give certain powers to the courts of that jurisdiction in relation to arbitrations seated there. Broadly speaking, these serve supportive and supervisory functions, such as orders to preserve assets or obtain evidence, or to determine challenges to the tribunal's award. The national law, and the general attitude of the judiciary in a country, will determine how supportive or interventionist those courts will be. Interventionist jurisdictions, where courts interfere in the arbitral process to the detriment of its autonomy, are to be avoided. 

Enforcement

Finally, it is important that the country of the seat of the arbitration has ratified the New York Convention, which is an international treaty providing for recognition of arbitration agreements and the enforcement of arbitration awards in over 170 countries. Some state signatories to the New York Convention will only enforce awards made in countries that are also signatories to the New York Convention (i.e. on a reciprocal basis) or where the underlying dispute relates to a subject matter deemed commercial under that jurisdiction's law. For a full list of New York Convention contracting states, see the UNCITRAL website.

A recent survey found the most popular seats globally to be as follows: London, Singapore, Hong Kong, Beijing, Paris, Shenzhen, New York, Shanghai, Geneva and Dubai.⁸

Choices relating to the arbitral tribunal

The parties can specify in their arbitration clause how many arbitrators are to be appointed or leave this to be determined under the relevant rules once a dispute has arisen. The number should always be odd and, usually, it will by either one or three arbitrators.

Sole arbitrators are likely to mean less expense (potentially , half as much as an arbitration with three arbitrators, or even less), and a faster process, since there is no need to coordinate multiple diaries for hearings, deliberations and so on. However, in high value international disputes, it is more common to provide for the appointment of a tribunal of three arbitrators. This is for two principal reasons. First, unless the parties can agree, a sole arbitrator will be appointed by a third party. By contrast, if three arbitrators are to be appointed, typically, each party will nominate one of the co-arbitrators, who will then jointly seek to agree the presiding arbitrator. This ensures that each party has an opportunity to input directly to the composition of the tribunal (it is important to note, however, party-nominated arbitrators must remain independent and impartial, and do not advocate for their appointing party). The second reason three-member tribunals are preferred is that some consider three arbitrators are more likely to reach the "right" decision. With a sole arbitrator, there is perceived to be a greater risk of a "rogue" decision. This is important since there are usually very limited grounds to appeal or challenge an arbitral award.

The parties can also specify that the arbitrators must be experienced in a particular industry or sector, belong to a specific professional organisation or have particular qualifications. 

However, if you provide for this in your arbitration clause, it is important that any characteristics required of arbitrators are objectively ascertainable. Otherwise, disputes may arise as to whether any specific individual meets the specified criteria. Parties should also be careful not to define the qualifications too narrowly, as there may then be an insufficient pool of arbitrators who are able or willing to accept appointment. In addition, you should never specify a named individual as that person may be unable or unwilling to act when the dispute arises and then the arbitration clause would be unenforceable.

Different procedural approaches

Parties rarely stipulate expressly the approach to specific procedural questions in arbitration clauses. However, such considerations may have a bearing on the parties' choice of the seat of arbitration, the arbitral rules, and the characteristics required of arbitrators to be appointed, as well as particular individuals ultimately nominated for appointment to the tribunal.

Different procedural approaches can be adopted. At a high level, these are often categorised as common law and civil law approaches (although this is a generalisation). A good understanding of the differences is important for two reasons. First, the parties' expectations (or those of their advisers) may arise in part from their familiarity with the procedural rules of the courts of their own jurisdiction and so they may prefer to take a similar approach when applying to the tribunal for specific procedural directions. Second, although under most sets of arbitration rules arbitrators have considerable procedural discretion, their starting-point when making procedural directions may draw on the court procedural rules with which they are most familiar, albeit tempered where necessary by an appreciation of the claimants' jurisdictional backgrounds. 

A "typical" civil law approach might involve:

• the tribunal adopting a more interventionist approach in managing the process;
• a restrictive approach to document production; and
• the tribunal playing a greater, more inquisitorial, role in gathering evidence.

By contrast, a common law approach is likely to involve:

• the tribunal deferring more to the parties;
• the scope of document production being broader and closer to US or English litigation; and
• at the hearing, US or English style cross-examination of witnesses and experts by the parties (with less intervention by by the tribunal).

The question of document production can be a particularly important issue where there are parties from different backgrounds. Depending on their perspective, parties may be concerned about the level of document production that will be permitted, considering that there will be either too little or too much, depending on their perspective. Where there is to be more extensive document production, the associated time and cost can be significant. In many instances experienced arbitrators will endeavour to bridge the gap between different legal systems and between the parties' expectations. 

These issues can be dealt with at an early stage of the proceedings. However, if the parties prefer more certainty, they may wish to deal with it in the arbitration clause, for example, by specifying that questions of document production will decided in accordance with the International Bar Association's Rules on the Taking of Evidence in International Commercial Arbitration.⁹ Alternatively, they may prefer to specify that the Prague Rules will apply.¹⁰ These are more recent and, therefore, less tested than the IBA Rules. However, the Prague Rules are generally perceived as taking a more civil law approach towards procedure and, in particular, document production. Either way, ensure you are aware of what you are agreeing to if either are to be adopted.

Choice of law

Choice of law clauses are separate from arbitration clauses, since these set out the applicable (or "governing") law regulating the parties' rights and obligations under the main contract and by which substantive questions are to be determined.¹¹ In contrast, an arbitration clause sets out the mechanism by which a dispute is to be resolved. However, choice of law clauses are often combined with arbitration clauses, so parties may have to consider this when drafting the arbitration clause. Also, in some circumstances, it may be important for parties to appreciate the distinction between the governing law of the contract, the procedural law of the arbitration, and the law applicable to the arbitration clause itself. 

Governing law of the contract

Parties should select an appropriate governing law carefully. The governing law of a contract can be pivotal, not only to its formation and validity, but also to the question of whether disputes arising under or in connection with the contract can be submitted to arbitration, and what remedies can be awarded by the arbitrators. It is always advisable, therefore, to specify the governing law when drafting the contract. Where the parties do not select a governing law, the choice will be made for them by the arbitrators, taking account of all the circumstances. 

Procedural law

The procedural law of an arbitration (sometimes referred to as the curial law or lex arbitri) is different from the governing law of the contract: this is the legal framework in which the arbitration will operate. The procedural law is normally that of the seat of arbitration. For example, the choice of London as the seat of arbitration would normally mean that the curial law of the arbitration will be English law. Although theoretically possible, it is not advisable to specify in the arbitration clause a different procedural law from that of the seat of arbitration. This can give rise to unnecessary complexity and significant uncertainty. Where possible, it is often desirable to align the governing law of the contract with the procedural law / seat.

Law governing the arbitration agreement

Under the widely-accepted principle of "separability", an arbitration clause contained in a contract is considered to be separate from the contract in which it resides (sometimes referred to as the "host" or "matrix" contract). This means that the arbitration clause survives the (alleged) termination or invalidity of the matrix contract, allowing any claims to be referred to, and resolved by, arbitration. 

It follows from the principle of separability that an arbitration clause can have a separate governing law from the governing law of the matrix contract. Where no express choice of governing law for the arbitration agreement is made, different jurisdictions apply different rules to determine which law applies. Some jurisdictions apply the governing law applicable to  matrix contract as a whole to the arbitration clause also. Others consider that the arbitration agreement is more closely aligned with, and should be governed by, the law of the chosen seat of arbitration. 

Where the governing law of the matrix contract and the seat of arbitration align, this should be straightforward. However, difficulties can arise where the governing law of the contract is different from the seat of the arbitration. For example, where the matrix contract is governed by New York law but the arbitration clause specifies the seat as Paris, without expressly stating the law applicable to arbitration agreement, disputes may arise. In order to avoid such disputes, it is sensible to either include in the arbitration agreement itself a governing law provision (where you want the governing law of the arbitration agreement to follow the law of the seat), or to expressly extend the matrix contract's governing law provision to the arbitration agreement (where you want the governing law of the contract to apply).

Other issues to address

Scope and validity of the arbitration clause

Generally, arbitration clauses will cover all disputes arising out of, or relating to, the relevant contract. Arbitral tribunals and courts in most jurisdictions typically construe these clauses broadly, and will not favour arguments to the effect that certain disputes fall outside the arbitration clause as a matter of contractual construction. Nevertheless, it is advisable to draft the arbitration clause broadly to cover any disputes or controversies arising out of, or in connection with, an agreement (including any non-contractual obligations). 

Another result of the principle of separability discussed above is that an arbitration clause will remain valid even if the contract in which it is found is alleged to be invalid. Moreover, there are limited grounds to challenge the validity of an arbitration clause itself. The New York Convention provides that the courts of a signatory country must uphold an arbitration clause, unless the clause itself is "null and void, inoperative or incapable of being performed".

Choice of language

It is advisable to provide for the procedural language of the arbitration, as this will determine the language of the written and oral submissions and evidence. If not specifically provided for, the tribunal will decide the language. Typically, this will be the language of the contractual documentation but this should not be assumed.

Multiple related contracts

One of the disadvantages of arbitration is that arbitrators, unlike national court judges, generally lack authority to join additional parties to the arbitration, or to consolidate related arbitrations, without the additional parties' consent. Where there are inter-related contracts, and the parties want any related disputes to be heard together or want the ability to join into the arbitration the various parties to the different contracts, it is possible to cater for that. However, advice on the drafting should always be sought.

Confidentiality

If confidentiality is a concern, it is sensible to insert an express confidentiality clause, as the approach to confidentiality can vary as between different arbitral institutions and different jurisdictions. A clause which specifically addresses the arbitration is advisable, as opposed to relying on more general confidentiality provisions that apply to the underlying contract. Several arbitral institutions provide standard wording for such clauses.¹² Alternatively, choose arbitration rules (including the SIAC Rules) that have express confidentiality provisions.

Waive the right to appeal?

Some national arbitration laws provide for rights of challenge or appeal to arbitral awards, which can be excluded by party agreement. The English Arbitration Act 1996, for example, includes both mandatory provisions allowing awards to be challenged on grounds relating to jurisdiction and serious procedural irregularities, and a non-mandatory provision  for appeals on points of (English) law. Parties can agree to waive this latter right to appeal.

Where they value finality, it is advisably to specify that they waive all rights of challenge and recourse against an award, to the extent such a waiver is permitted by the laws of the seat of arbitration. Many institutional rules (including those of the ICC and LCIA, for example) include a broad waiver to this effect, meaning that adoption of those rules will generally be effective to waive all those rights of appeal or challenge that are waivable. 

More complex drafting options

Given the priority accorded to party autonomy in arbitration, there are various other things that an arbitration clause may provide for. This includes:

• Escalation provisions: the parties can provide that, before commencing arbitration, they must attempt to resolve their dispute by some other means of alternative dispute resolution, such as negotiation or mediation for a certain period. However, caution is needed as, depending on the drafting, this may operate as a condition precedent, preventing a party from resorting to arbitration until the specified period is exhausted, even where there is urgency or limitation issues.
• Unilateral or asymmetric clauses: where there is an inequality of bargaining power between the parties, the one with greater leverage may specify that, while the other party is limited to commencing arbitration, it shall have an option to commence arbitration or to bring a claim before a specified national court. While this flexibility may be perceived as advantageous to the party benefiting from it, such clauses are not valid in all jurisdictions and may render the arbitration clause as a whole invalid. These are discussed further in our Quickguide, Use of arbitration in finance disputes.
• Carve out clauses: If there are particular categories of dispute that the parties agree should be determined by, for example, litigation, as opposed to arbitration, these can be carved out of the arbitration agreement. However, this can introduce unintended complexities where multiple disputes arise down the line, and may lead to related disputes being determined in parallel in different fora.

There are many other possible options that can be included in an arbitration clause, however, careful drafting is required, appreciating the context of the overall transaction. Specialist advice should always be sought.

Sample clauses

Most institutions recommend sample clauses for use when their institutional rules are being adopted. These are revised from time to time and so it is best to check the websites. We list the key institutions and provide links to their sample clauses below.

Note that the clauses are only sample clauses. They may need to be modified to take into account requirements of national law and the specific requirements of the contracting parties. However, they provide useful examples of a basic arbitration clause and can easily be adapted.