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Arbitration – Flexible option, but only if you use it

Aktuelt | 24.03.20

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In competition with the more substantive parts of the contract, the arbitration clause rarely receive much attention, neither at the drafting stage, nor when a dispute has arisen. This is unfortunate as there are very often unexploited opportunities to ensure a smoother and more cost effective dispute resolution.

The first thing to consider when drafting an arbitration clause is of course whether to have one at all. In many cases, recourse to the ordinary courts would be as if nor more appropriate, but this is not the topic at hand. Frequently, arbitration will be the only option, due to for example enforcement consideration or industry practice. In these cases, you might as well make the most of the flexibility it provides.

What is a suitable procedure for the resolution of one dispute might not necessarily be ideal for another. Some of these characteristics may be apparent already at the onset of the contractual relationship, whilst others only become apparent once a dispute has arisen.

A typical arbitration clause could look something like this:

All disputes arising under this contract shall be resolved by arbitration in London in accordance with the LCIA rules.

The first thing to note about this clause is that it does not specify any mediation prior to the commencement of arbitration procedures. Arbitrations are costly and the various mediation alternatives available can boast of quite impressive settlement frequencies. It would be well worth considering either the inclusion of a mandatory mediation clause or at least a reference to a voluntary option.  

Further, the sample clause above prescribes that the arbitration shall be conducted in accordance with the rules of the London Court of International Arbitration. This is often referred to as institutional or administered arbitration, as opposed to ad-hoc arbitration. A number of organizations, of which the LCIA is one, offer administrative assistance as well as a set of rules that provide a framework for the arbitration. In many, and in particular larger cross-border disputes, this may be a useful service, but it does come with additional cost and bureaucracy. Its inclusion as a mandatory element of the dispute resolution clause should at the very least be a conscious choice made after scrutinizing the applicable rules and the institution's track record.

Acknowledging that future disputes may come in many shapes and magnitudes it would furthermore be worth considering a differentiated regime. We often see that an expensive dispute resolution mechanism functions as a de facto bar to pursue otherwise bona fide claims. This could be resolved by specifying that where the amount in dispute is lower than a certain threshold, some sort of small claims procedure shall apply. Some of the arbitration institutions have their own small claims procedures, but the parties could also agree to for example written proceedings before only one arbitrator, or even recourse to the ordinary courts for such disputes.

In addition to a distinction between small and larger disputes, it should also be considered whether some categories of disputes should be carved out from arbitration or be subject to a different procedure. It is for example common to exclude certain disputes concerning intellectual property rights from arbitration. One would also often see explicit provisions allowing for injunctive relief through the ordinary courts. Under Norwegian law, this is unnecessary as the Arbitration Act Section 8 confers such discretion to the courts regardless, but it may be a prudent exclusion in other jurisdictions. 

In addition to the more fundamental considerations above, you can fine-tune almost any detail of the dispute resolution to fit the contractual relationship you are entering into. Some elements to consider include the number, appointment and qualifications of your tribunal, language of the arbitration and whether evidence must be translated, the tribunal's authority to limit evidence, time limits, confidentiality, apportionment of liability for attorney fees and a number of other practicalities. These elements may appear remote and arbitrary when entering into the contract, but they have real implications if a dispute arises later.

Finally, it should be noted that if a dispute is coming up and your contract only contains a bare minimum standard clause, it is not necessarily too late. The parties are free to agree to any deviating procedure also after the fact. Indeed, at this stage the parties will know more about what sort of dispute resolution might be suitable for the specific dispute at hand and would be well advised to revisit these issues in any event. Unfortunately, the climate for reaching procedural agreements once a substantive dispute is on the table is not always the best. In these cases, you may be happy that you spent some time tinkering with the arbitration clause at the onset.