ARBITRATION CLAUSES IN COMMERCIAL CONTRACTS

This Article is written by Saman Mushtar of Aligarh Muslim University, an intern under Legal Vidhiya

INTRODUCTION

Arbitration clause is an important contractual element in contract that requires dispute or disagreement in contract to be settled by arbitration as contrary to litigation A clause requiring the parties to arbitrate their disagreement rather than settle it in another manner is known as an arbitration clause. The clause typically contains specifics like the location of the arbitration, the name of the private organization or provider that will oversee the proceedings and provide an arbitrator, the number of arbitrators who will hear and render a decision, and whether the costs will be divided between the parties or if the winning party is entitled to reimbursement for reasonable legal fees and costs. The arbitration clause is a particular agreement between the parties that authorizes arbitration as the exclusive means of resolving their future disputes and expresses their mutual willingness to bring their case outside of the national courts. A well-written arbitration provision accomplishes several crucial goals, including increasing the effectiveness of the arbitration procedure and, more importantly, acting as a strong tool for successfully settling conflicts. By doing this, it serves as a disincentive to agreement violations and, as a result, reduces the possibility of filing a lawsuit. It is important to remember that the arbitration clause is frequently the most important element in a contract to prevent drawn-out and expensive conflicts.

Arbitration clause specifies the ways and methods, regulations, and arbitration if dispute emerges between parties. To settle disputes with guaranteed justice and efficiency, it is essential to carefully determine the jurisdiction.

WHAT IS AN ARBITRATION CLAUSE?

“The arbitration clause is frequently the most vital item in a contract to prevent lengthy and expensive conflicts.”

Contracts that include arbitration clauses are essential because they provide a way to resolve disputes outside of the conventional judicial system. Both law students and practitioners in India must comprehend their drafting complexities and legal ramifications. A contract provision requiring arbitration rather than litigation to resolve disputes between the parties is known as an arbitration clause. The Arbitration and Conciliation Act of 1996 defines an arbitration agreement as “an agreement by the parties to submit to arbitration all or certain disputes, whatever can come up between them regarding a specific legal connection, whether or not it is contractual (Section 7(1)

An arbitration clause is a clause in a contract that requires the parties to arbitrate their dispute instead of resolving it in any other way. This usually implies that the opposing party cannot compel you to file a lawsuit. They will have to go through the arbitration procedure instead. This may be better for you since you won’t have to deal with someone who insists on going to court, even if it will cost you more money and take up more time.  If a third party believes they can prolong the legal process to the point where your company can no longer afford it, they may insist on litigation. An arbitration clause will assist you in avoiding this kind of circumstance.

It is crucial to emphasize that there isn’t a single “one-size-fits-all” or “generic” arbitration clause that can be applied to any type of contract. Rather, every arbitration clause needs to be carefully crafted to fit the particular needs and preferences of the parties as well as the particular environment of the contract. The provision should take into account the needs of the parties, the relevant legal frameworks, and the possible kinds of disputes that may occur. Unfortunately, the arbitration clause is usually one of the last clauses discussed in a contract, added as an afterthought, and written in general terms. When a disagreement arises, omitting important clauses or failing to modify the arbitration clause to the specifics of the contract can lead to inefficiencies, needless disputes, and higher costs. In order to settle future conflicts quickly and affordably, arbitration clauses are being included to contracts. An arbitration agreement that was drafted hurriedly may end up being troublesome due to vagueness or enforceability concerns, which might ultimately result in lengthy and expensive legal challenges. There are several mandatory components that must be included when writing an arbitration provision. Additionally, at the parties’ choice, a plethora of other, optional clauses may be added.

CLASSIFICATION OF ARBITRATION CLAUSES IN INTERNATIONAL COMMERCIAL CONTRACTS

“The goal of including arbitration clauses in contracts is to settle future disputes quickly and affordably.”

Arbitration clauses fall into one of three categories: simple, general, or complex.

• The most essential elements required for a functional arbitration agreement are included in basic terms. This category includes most institutional model provisions.
  
  
• General clauses go beyond the fundamental terms and are frequently used in large transactions. They include extra components meant to handle particular problems, such choosing the location, language, and relevant legislation, as well as phases like mediation or negotiation. When some but not all of these possible elements are necessary, or when the parties are unwilling to violate mandatory legal requirements or depart from institutional regulations, general clauses are used. Time and resource restrictions are frequently to blame for this.

• A variety of provisions are included in complex clauses, some of which may be unusual and not generally recognized. It takes careful customization to prevent discrepancies and extensive study to make sure that the provisions are in line with the legal framework of the jurisdiction when crafting complicated clauses. Complex clauses may contain provisions pertaining to confidentiality, discovery, multi-party arbitration, dispute consolidation, split clauses that require arbitration for some issues and litigation for others, expert determination, arbitrability, waivers of appeals or consent to appeals, and authorization to amend the contract or fill in any gaps. These elements are in addition to those found in general clauses.

An arbitration clause is a type of unique agreement between the parties that authorizes arbitration as the exclusive means of resolving their future disputes and expresses their mutual willingness to bring their case outside of the national courts. The following particular components must to be included in the arbitration clause:

• the legal notice or notification procedure via which any party can notify the other of their intention to enforce the arbitration clause;
• the pre-arbitration procedure—in some cases, a certain amount of time must pass following notice before the arbitration process starts (referred to as the arbitration clause’s maturity); and
• methods used in the arbitration process, including the arbitral seat, the country or jurisdiction where the arbitration will take place, or the arbitration institution chosen by the parties;
  
  

If the parties have the option to select the number of arbitrators who will hear their case, they can select either a tribunal group with three arbitrators or only one arbitrator. The language of proceedings in international corporate arbitrations is often English.

“These kinds of elements should reflect and express the parties’ free will, and this free will should be considered as an authorised declaration of the parties’ intention to use arbitration as a way to resolve their disputes instead of going through the ordinary litigation process”.

KEY ELEMENTS IN ARBITRATION CLAUSE

The proper operation of arbitration procedures depends on a well-written arbitration clause. Here are some important factors to think about:

1. Arbitration Scope: Clearly state the kinds of issues that will be arbitrated. This can contain general language that addresses all disagreements pertaining to contracts, or it might be restricted to particular problems.

• Governing Rules: Determine which arbitration rules will apply to the case. A lot of parties use rules from reputable groups like the American Arbitration Association (AAA) or the International Chamber of Commerce (ICC). These guidelines help eliminate uncertainty and offer structure, which is consistent with accepted arbitration law norms.

• Selection of Arbitrator(s): Indicate how many arbitrators there will be (usually one or three) and how they will be chosen. Certain provisions permit one arbitrator to be selected by each side, and a third arbitrator may be selected jointly or by the two arbitrators who were appointed.

• Venue and Language: Specify the arbitration’s location and language. In multinational contracts, where parties may come from various nations with diverse legal and cultural backgrounds, this is particularly crucial.

• Confidentiality Requirements: If maintaining the privacy of the procedures and results is crucial, include wording pertaining to confidentiality. Although arbitration law generally protects privacy, certain clauses can further shield private data.

Parties can establish a more dependable and efficient dispute resolution procedure by addressing these components in an arbitration agreement. Additionally, it shows that both parties are committed to a just and law-abiding strategy based on arbitration law principles.

IMPORTANCE OF ARBITRATION CLAUSE

A commercial contract that has an arbitration provision may help firms in several ways. In the case of a disagreement, arbitration clauses primarily provide a clear structure for settling disputes, therefore decreasing confusion. By agreeing to arbitrate disputes in advance, parties can steer clear of costly and time-consuming litigation that could interfere with company operations. Through predictability and the maintenance of professional ties, arbitration legislation guarantees that disagreements are resolved quickly. Arbitration can be effective in many ways, some are as follows: –

1. Efficiency and Speed: Arbitration’s efficiency is one of its most important advantages. Cases in court can go on for months or even years, taking up time and money. On the other hand, arbitration usually settles conflicts far more quickly, freeing up companies to concentrate on their main business.

• Confidentiality: Sessions of arbitration can be held in secret, in contrast to court proceedings, which are often open to the public. Businesses that want to safeguard proprietary data, trade secrets, or sensitive information during legal disputes must maintain this secrecy.

• Expertise: Choosing an arbiter with specific expertise of the pertinent legal field is another benefit of arbitration. This makes sure that the person handling the issue has a thorough understanding of the intricacies of the particular case, which will result in a more accurate and knowledgeable settlement.

• Flexibility: Parties can use arbitration to establish conditions for the process and deadlines that are advantageous to both parties. This degree of authority may be quite helpful when managing intricate business partnerships.

The foundation of business interactions in today’s more linked global economy is commercial contracts. The arbitration provision is one of the most important parts of these contracts. This clause, which is frequently disregarded, is essential to provide parties to a contract clarity and protection.

THE PRACTICAL APPLICATION OF ARBITRATION CLAUSES IN

COMMERCIAL CONTRACTS

A commercial contract’s arbitration provision usually specifies precise guidelines for arbitrating disputes. For example, it could specify the venue for arbitration, the regulations that will control the process, and the number of arbitrators. While some sections are rather precise, others only state that arbitration will be employed; the details are left up to the individual parties. These provisions, regardless of their level of specificity, are enforceable under arbitration law and demand that both parties abide by the obligations specified.

The arbitration process itself may vary based on the nature of the dispute and the decisions made by the parties. Before making a decision that is legally binding, an unbiased arbitrator or panel of arbitrators frequently hears arguments from both sides. With very few exceptions, these decisions are frequently not appealable or changeable since arbitration law upholds their finality.

CONCLUSION

Businesses can benefit from arbitration clauses in contracts in a number of ways, including increased productivity, privacy, and dispute resolution flexibility. These provisions, a fundamental component of arbitration law, are a helpful instrument for businesses attempting to safeguard their interests while lowering the expenses and inconveniences connected with conventional litigation. Parties should carefully consider important facts and potential obstacles when evaluating arbitration agreements in order to optimize the advantages.
Businesses may rest easy knowing that a fair and effective arbitration procedure is in place in the event of a disagreement if the arbitration clause is well-written. As arbitration law evolves, businesses now have more tools and precedents to create arbitration procedures that follow best practices.

In brief, drafting a commercial contract with the help of arbitration clause helps in significant deliberations between two and more parties on various subjects. These are usually considered in international agreements over the manner in which disputes are ought to be settled. In this parties first required to first negotiate and then agree on important issues, like the law governing the arbitration, rules and provision etc. Where an arbitration clause is properly used it helps in providing efficient method for dispute settlement.

REFRENCES

1. Doak Bishop, Craig Miles & Roberto Aguirre Luzi, Strategic Decisions in Drafting Arbitration Clauses for International Contracts, Latin Lawyer, https://latinlawyer.com/strategic-decisions-in-drafting-arbitration-clauses-international-contracts
2. The Arbitration and Conciliation Act, No. 26 of 1996, § 7 (India).
3. International Arbitration Rules and Procedures art. 30.2 (2021), https://www.jamsadr.com/international-arbitration-rules/

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is personal.

Hitesh Prajapat