7 Tips for Drafting an Effective Arbitration Clause

When it comes to dispute resolution, arbitration emerges as a preferable option among commercial parties, surpassing other methods due to its numerous valuable features. With its efficient, cost-effective, and confidential nature, arbitration has become a more favored alternative for resolving conflicts.

To truly utilize the benefits of arbitration, it is essential to pay attention to the drafting of arbitration clauses, because a carefully constructed arbitration clause fully utilizes the advantages of arbitration and can significantly mitigate many risks. In this article, I will highlight seven fundamental factors to consider for drafting arbitration clauses that are more impactful and efficient.

1) Scope of the arbitration

It is crucial to consider the scope of the arbitration when drafting arbitration clauses because it contributes significantly to ensuring that the arbitration process is effective. The scope of the arbitration agreement essentially defines the disputes that can be resolved through arbitration rather than through traditional dispute resolution methods such as court proceedings.

By clearly defining the scope of the arbitration agreement, parties can avoid ambiguity and potential conflicts later. One of the key advantages of arbitration is its flexibility, allowing parties involved to tailor the process to meet their specific needs and concerns. However, without a well-defined scope, the benefits of arbitration may be compromised; on the other hand, a clearly defined scope could eliminate legal battles pertaining to the validity or interpretation of any arbitration clause down the line.

2) Enforceability of the Award

Ensure the finality and enforceability of the arbitration award. The award represents the arbitrator’s decision on the merits of the dispute. It is vital to establish that the award is conclusive and obligatory for all parties involved, who are expected to adhere to it promptly. Furthermore, it is crucial to guarantee that the award can be enforced in various jurisdictions where such action may be necessary.

3) Language and the rule of evidence

Drafting a clause with ambiguous or poorly written language can often result in disputes among involved parties and confusion that can be avoided. On the other hand, it is crucial to use precise terminology and avoid vague references in order to avoid complications. This will result in a comprehensive understanding of the types of disputes covered in the arbitration agreement as well as ensure that arbitration proceedings progress smoothly.

4) Number and Qualifications of the Arbitrators

Although one to three arbitrators are common options, there are instances where a panel consisting of more arbitrators may be necessary. Complex disputes or cases involving multiple parties often require the expertise and perspectives that a panel can provide. This diverse range of knowledge and viewpoints contributes to a fair and informed decision-making process.

Factors such as expertise, experience, nationality, and language proficiency should be taken into account when selecting arbitrators. Striking a balance between efficiency and ensuring a thorough and impartial arbitration process is essential in selecting the appropriate number of arbitrators and their qualifications for each unique case.

5) Selection of an Arbitral Institution

When drafting arbitration clauses, the choice of an arbitral institution plays a crucial role in guaranteeing a seamless and well-organized resolution procedure. Two prominent arbitral institutions are the American Arbitration Association (AAA) and the International Chamber of Commerce (ICC).

6) Address the Fees  

To draft effective arbitration clauses, include provisions that address the distribution of expenses and charges associated with the arbitration process at different stages of the proceedings. Such a provision aids in managing the costs of arbitration and provides clarity for the parties involved. By establishing a budget, the parties gain a better comprehension of the projected expenses and are empowered to make well-informed decisions regarding the arbitration process.

7) Confidentiality

Maintaining confidentiality is a priority for any business, so it is important to address and include specific provisions regarding the confidentiality of the arbitration proceedings. While arbitration typically offers a higher level of confidentiality compared to other dispute resolution methods, including specific clauses emphasizing confidentiality offers an additional layer of assurance.