International Arbitration Clauses

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International Arbitration
Clauses

Unlike litigation, arbitration must be

specifically chosen by parties as a dispute
resolution mechanism. This choice can be set
out in a separate arbitration agreement or,
more commonly, incorporated into the
underlying commercial agreement by an
arbitration clause. This guide addresses the
issues to bear in mind when drafting
international arbitration clauses.

Topics covered include:

Why choose arbitration?

How to draft an arbitration clause:

overview

Key questions

Which arbitral rules should be used?

Ad hoc arbitration
Institutional arbitration
Choosing the arbitral institution

Well-known arbitral institutions

Where should the arbitration take place?

Legislative framework

How many arbitrators should there be?

Different procedural approaches

Choice of law

Scope and validity of the arbitration

clause

Sample clauses

This publication is not intended to be a comprehensive review of all

developments in the law and practice, or to cover all aspects of
those referred to. Readers should take legal advice before applying
the information contained in this publication to specific issues or
transactions. For more information please contact us at Ashurst
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 International Arbitration Clauses

International Arbitration Clauses 1

1. Why choose arbitration?

Parties to international commercial disputes often choose arbitration because:

they can have the dispute heard in a forum which they perceive to be more neutral than a national court;

they can often enforce an arbitral award abroad more easily than they can a court judgment because of
the New York Convention;2

they can select arbitrators with expertise in the relevant industry or subject-matter of the underlying
commercial contract;

they can choose the language that the proceedings will be conducted in;

arbitration offers greater procedural flexibility compared with court proceedings;

the proceedings are generally private and confidential;

disputes can be resolved faster because the possibility of appeals is minimised; and

sometimes costs can be lower.

However, sometimes parties prefer to go to litigation in a national court. This is because:

the range of remedies in litigation is usually wider than in arbitration. It is possible to obtain orders
affecting third parties which are not party to the agreement to arbitrate, for example, a freezing order
which can be served on a third party bank;

litigation in some jurisdictions is quicker and cheaper than international arbitration;3 or

they wish to seek publicity for a claim or set a precedent.

2. How to draft an arbitration clause: overview

The first step is to consider what the parties want to achieve. Is speed the aim or a possible cost saving? Is
confidentiality the key factor? Or is arbitration the only viable means of dispute resolution, given that there are
two or more international parties involved?

As with all contract clauses, to introduce a "standard" arbitration clause into all contracts can be unhelpful, since
there is no such thing as a "standard" contract or a "standard" dispute. Rather, the parties should consider
whether there are any matters that the clause ought to address in the particular circumstances.

The parties should consider:

the nature and value of potential claims (monetary and otherwise);

the complexity of potential claims, including whether these are likely to involve technical matters;

1
Please note that in some countries there is a difference between "international arbitration" and "domestic arbitration". References here to
"arbitration" are to international arbitration (although much of this guide is equally applicable to domestic arbitration).
2
The 1958 UN Convention on The Recognition and Enforcement of Foreign Arbitral Awards.
3
Although it may not be if the judgment is appealed.

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the speed with which a decision is required (e.g. is there an ongoing contract to be performed?);

the location of the relevant parties, and (for the purposes of enforcement) their assets;

the language to be used in the arbitration;

whether the resolution of the dispute is likely to require written or oral evidence;

multi-party issues: are there 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 ADR such as mediation is desirable;

whether there are any particular types of dispute (such as completion account disputes) which would be
more suited to expert determination rather than arbitration.

Some of these issues give rise to distinct drafting points in their own right and 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 threats parties can tailor the arbitration mechanism to the likely types of dispute. For
example, if one's counter-party is a state-owned entity from a country in which state-owned entities are known
to take every opportunity to delay proceedings, an arbitration administered by a well-known international
arbitration institution is likely to be preferable to an ad hoc arbitration.

3. Key questions

Parties must address the following when drafting any arbitration clause:

which arbitral rules should be used? In particular, is ad hoc or institutional arbitration preferable?

where should the arbitration take place?

how many arbitrators should there be?

4. Which arbitral rules should be used?

All arbitrations must be conducted under arbitral rules. These can be chosen by the arbitrators themselves but it
is better for the parties to specify which rules should be used. A basic choice is between arbitration under "ad
hoc" rules and arbitration under "institutional" rules.

Ad hoc arbitration

This is conducted under rules adopted for the purpose of the specific arbitration, without the involvement of any
arbitral institution. Here the parties can draw up all the arbitral rules themselves. However, since this can be
time-consuming and expensive, they usually either leave the rules to the discretion of the arbitrators or they
adopt rules specially written for ad hoc arbitration, for example, the UNCITRAL Rules.4

4
The United Nations Commission on International Trade Law Arbitration Rules (as revised in 2010), available online at
http://www.uncitral.org/pdf/english/texts/arbitration/arb-rules-revised/arb-rules-revised-2010-e.pdf. Please note that UNCITRAL is not an arbitral
institution and does not administer arbitrations.

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 International Arbitration Clauses

Institutional arbitration

This is arbitration administered by a specialist institution. Parties should incorporate the rules of the selected
institution into their arbitration clause by reference. Such rules are expressly formulated for arbitrations
conducted under the administration of the relevant institution.

What are the advantages of institutional arbitration? It can lend political or moral weight to awards but, more
practically, because institutional rules are designed to regulate the proceedings comprehensively from beginning
to end the institutions are better suited to cater for contingencies that might arise, even if (as sometimes
happens) the respondent fails or refuses to co-operate.

There are other advantages: by choosing institutional arbitration the parties can avoid the time and expense of
drafting a suitable ad hoc clause; the fees and expenses of the arbitration are, with varying degrees of certainty,
regulated; and some arbitral institutions independently vet awards. Having said that, the additional layer of
bureaucracy imposed by institutional arbitration may cause delay and, inevitably, additional fees are payable.
Although the arbitrators' fees are reduced because they have less administration to do, the fees of the institution
can add a significant amount to overall costs. This is particularly so where large amounts are in dispute and the
fees are calculated by reference to the value of the claims (as is the case with ICC arbitration).

Choosing the arbitral institution

There are many institutions to choose from (see examples in the following section). There is no magic formula
for selecting between them. Sometimes parties are influenced by differences in the rules themselves, sometimes
by familiarity, and sometimes by their opinion of the international acceptability or reputation of a given
institution and/or its cost and speed. Ashurst can, on request, provide a comparison of the different institutions
and their rules but questions to ask include:

do the rules cater for the specific needs of the parties?

what is the reputation and experience of the institution?

how much institutional involvement will there be?

how many arbitrators should there be in default of agreement?

what will the fees and costs be and how are they calculated?

5. Well-known arbitral institutions

London Court of International Arbitration ("LCIA") www.lcia-arbitration.com/index.htm

German Institute for Arbitration ("DIS") www.dis-arb.de

International Court of Arbitration of the International www.iccwbo.org/index_court.asp

Chamber of Commerce ("ICC")

Singapore International Arbitration Centre ("SIAC") www.siac.org.sg

American Arbitration Association ("AAA") (and in www.adr.org

particular their International Centre for Dispute
Resolution ("ICDR") www.adr.org/sp.asp?id=21890

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Copies of the rules and recommended wording for arbitration clauses are published by the above institutions on
their websites. These may need supplementing, however. Sample clauses for LCIA and ICC institutional
arbitration and also for ad hoc arbitration using the UNCITRAL Rules appear at the end of this guide.

6. Where should the arbitration take place?

This is one of the most important matters to specify when drafting an arbitration clause. Choosing where the
arbitration is to take place (or the "seat" of the arbitration) can affect:

whether the courts of the seat will intervene in the arbitration;

whether any other rules are imposed, in addition to the arbitral rules chosen by the parties;

whether the dispute is "arbitrable" in that country, that is, whether the subject-matter is something over
which the local courts reserve exclusive jurisdiction (such as matters relating to crime) so that it cannot
be submitted to arbitration;

the possibility of the arbitral award being challenged or appealed; and

the enforceability of the arbitral award.

The parties must consider both the legislation enacted in the particular jurisdiction relating to arbitration, and the
attitude of the national courts towards arbitration generally in that jurisdiction.

7. Legislative framework

Most countries have legislation governing arbitrations that take place in their territory. This does not replace the
arbitral rules chosen by the parties but provides a framework in which those rules operate. The UNCITRAL Model
Law on International Commercial Arbitration is intended to even out disparities between these national laws and
suggest a common standard. Its objective is to provide comfort to parties investing in countries which have
adopted it.5 The Model Law tries to restrict unnecessary court intervention. Other countries have been influenced
by the Model Law when adopting new legislation. The English Arbitration Act 1996 is not based directly on the
Model Law but draws on many of its elements and goes a considerable way towards achieving similar results.

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). If the local arbitration law is not based on
the Model Law, however, parties should not select the location without first investigating the likely impact of its
legislation on any arbitration. For example, local law may require mandatory procedures to be implemented; the
courts may be able to intervene excessively during the arbitration; and there may be barriers to enforcement of
awards, including allowing multiple avenues for appeal.

Finally, it is important that the country chosen has ratified the New York Convention. This is because some
countries which are signatories to the Convention will only allow enforcement of awards which have been made
in countries which are also signatories to the Convention. Over 140 countries have ratified the Convention,
including most of the world's leading trading nations. For a full list of countries please see the UNCITRAL
website.6

5
The UNCITRAL Model Law was published in 1985 and revised in 2006. Legislation based on it has been enacted in 97 jurisdictions, including
Australia, Canada, Egypt, Germany, Hong Kong, India, Japan, Mexico, Nigeria, Korea, Russia, Singapore, Spain, Scotland, and certain states in
the United States (including California and Texas). For a full list please see:
www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration_status.html
6
www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html

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 International Arbitration Clauses

Approach of the courts

It is also worth noting that a country may aim to be seen as a modern, favourable forum for international
arbitration, but in practice when the courts become involved, an arbitration may come to a grinding halt for
many months, if not years.

Countries which have legislation and courts that are generally accepted to be favourable to the efficient operation
of arbitration include (in no particular order): England, France, Singapore, Switzerland, Hong Kong, and the USA
(New York).

8. How many arbitrators should there be?

The parties can specify the number of arbitrators in the arbitration clause or leave this to be determined under
the relevant rules once a dispute has arisen. Usually an arbitration is heard by either one or three arbitrators
(indeed some countries stipulate this or require there to be an odd number). Sole arbitrators mean less expense
and delay. In general, an arbitration conducted by a sole arbitrator is likely to cost, overall, about half as much
(or even less) as an arbitration with three arbitrators. However, in high value international disputes it is usual to
provide for the appointment of a tribunal of three arbitrators. A sole arbitrator is appointed by a third party if the
parties to the dispute cannot agree, but if there are three arbitrators each party can nominate one of the
arbitrators, which can ensure that at least one of the arbitrators is familiar with the national or legal culture of
the country where the relevant party is based. Note that in international arbitration, such an arbitrator is not to
act as an advocate of the appointing party in the deliberations of the arbitral tribunal. Some also perceive three
arbitrators as being more likely to reach the "right" decision than a sole arbitrator; this is important since there
are usually limited grounds to appeal or challenge an arbitral award.

9. Different procedural approaches

Parties rarely stipulate expressly the approach to specific procedural questions in arbitration clauses, but such
considerations may have a bearing on the parties' choice of the seat of arbitration, the arbitral rules, and the
identity of the nominated arbitrators.

Different approaches can be adopted to the procedure used at an arbitration. Conventionally, these are
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
spring 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 be the court procedural rules with which they are most
accustomed, albeit tempered where necessary by an appreciation of the claimants' jurisdictional backgrounds.

A civil law approach might involve:

the tribunal adopting a more interventionist approach;

a more restricted scope to disclosure of documents; and

the tribunal playing a greater role in gathering evidence.

A common law approach is likely to involve:

the tribunal being less interventionist;

the scope of disclosure of documents being similar to US or English litigation; and

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US or English style cross-examination of witnesses and experts by the parties (rather than by the
tribunal).

The question of document disclosure can be a particularly important issue where there are parties from different
backgrounds. Depending on their perspective, parties may be concerned that there may be either too little or too
much disclosure. In many instances experienced arbitrators will endeavour to bridge the gap between different
legal systems and between the parties' expectations, but if the parties prefer more certainty on this issue they
may wish to consider specifying in the arbitration clause that questions of document disclosure will be governed
by the International Bar Association's Rules on the Taking of Evidence in International Commercial Arbitration7,
which steers a compromise course.

10. Choice of law

Choice of law clauses are, strictly speaking, separate from arbitration clauses, since these set out the applicable
(or "governing") law regulating the parties' rights and obligations, by which substantive questions are to be
judged.8 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.

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, often by reference to the applicable conflict of
laws rules in the seat of the arbitration or, for EU contracts, by reference to the Rome I Regulation on the Law
Applicable to Contractual Obligations.

Procedural law

The procedural law in an arbitration is different from the governing law of the contract: this is the law by which
the arbitration will operate (such as the UNCITRAL Model Law). It is possible, but rare in practice, for parties to
specify in the arbitration clause what the procedural law will be for an arbitration arising out of the contract.
Without this being specified, the procedural law is normally assumed to be the law relating to arbitration in the
seat of the arbitration. Indeed, it is not advisable to specify in the arbitration clause a different procedural law
from the procedural law in the seat of the arbitration, since this may give rise to conflicts that the local courts
will have to resolve.

Law applicable to the arbitration clause

Under the widely-accepted principle of "separability", an arbitration clause in a contract is considered to be

separate from the contract in which it resides. This means that the arbitration clause survives termination of the
contract and allows any claims arising out of that termination to be referred to arbitration. It is generally
assumed that where no separate choice of law for the arbitration clause is made, the governing law of the
contract as a whole is also the governing law of the arbitration clause. However, difficulties can arise where the
governing law of the contract is different to the seat of the arbitration, e.g. English governing law but the seat is
Paris. In those circumstances, disputes can arise as to what the governing law of the arbitration agreement is,
and the general tendency is for the law of the seat to apply (by applying the closest connection test). In order to

7
See http://www.ibanet.org/Document/Default.aspx?DocumentUid=68336C49-4106-46BF-A1C6-A8F0880444DC.
8
There are separate Ashurst Quickguides which deal with governing law and jurisdiction clauses.

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 International Arbitration Clauses

avoid such disputes, it is sensible to include in the arbitration agreement a governing law provision (where you
want the governing law of the arbitration agreement to follow the law of the seat), or to extend the governing
law provision so that it also covers the arbitration agreement (where you want the governing law of the contract
to apply).

11. Scope and validity of the arbitration clause

Generally, arbitration clauses will cover all disputes arising out of the relevant contract and courts will not favour
arguments that say that certain disputes do not fall within the wording of the clause as a matter of construction.9
Also, 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 is "null and void, inoperative or incapable of being
performed".

12. Sample clauses

These samples are the standard LCIA, ICC and UNCITRAL clauses (available on their respective websites). 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.

Institutional arbitration

LCIA
Any dispute arising out of or in connection with this contract, including any question regarding its existence,
validity, or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules
are deemed to be incorporated by reference into this clause. [The Emergency Arbitrator Provisions shall not
apply].10

The number of arbitrators shall be [one/three].

The seat, or legal place, of arbitration shall be [City and/or Country].

The language to be used in the arbitral proceedings shall be [ ].

The governing law of the contract shall be the substantive law of [ ].

ICC
All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of
Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with
the said Rules. [The Emergency Arbitrator Provisions shall not apply].11

The ICC also advises that the parties should stipulate:

the law governing the contract;

the number of arbitrators;

9
The English courts have given strong support to the proposition that arbitration clauses should be liberally construed. See Premium Nafta Products
Ltd and others -v- Fili Shipping Company Limited and others [2007] UKHL 40.
10
The LCIA Rules provide for the appointment of an Emergency Arbitrator. If the parties do not want that option to be available, they specifically
have to opt-out by including the wording in [ ].
11
The ICC Rules provide for the appointment of an Emergency Arbitrator. If the parties do not want that option to be available, they specifically
have to opt-out by including the wording in [ ].

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International Arbitration Clauses

the place of arbitration; and

the language of the arbitration.

Ad hoc arbitration

UNCITRAL Rules
Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or
invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules.

UNCITRAL also advises that the parties consider adding:

(a) The appointing authority shall be (name of institution or person);

(b) The number of arbitrators shall be (one or three);

(c) The place of arbitration shall be (town or country); and

(d) The language(s) to be used in the arbitral proceedings shall be

The parties may also want to include a waiver of any rights to appeal to the extent permitted under the
applicable law (which is automatically provided for under the LCIA and ICC Rules).

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Ashurst Quickguides

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If you would like further information on this

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