Drafting an arbitration agreement: Checklist

Drafting an arbitration agreement: Checklist

A poorly worded provision and/or a poorly advised client may result in, among other things, invalidation of an arbitration clause resulting in litigation in local courts, a proceeding under an arbitration clause that gives one party an unfair advantage over the other party, dispute resolution procedures that are excessively expensive, or a client that is unhappy with his or her transactional lawyers.

Every transactional lawyer should take the time to consult an experienced arbitration lawyer before agreeing to a particular arbitration provision. James Zimmerman, Office Managing Partner for the Beijing office of the international law firm of Sheppard Mullin Richter & Hampton LLP, sets out his checklist of points to consider when drafting an arbitration agreement.

Questions you need to ask include:

  • Which institutions have a strong reputation?
  • What are the differences between those institutions and which is likely to best suit my client’s needs?
  • Why is the seat of arbitration important?
  • Which seats are considered ‘safe’?
  • How specific should the arbitration clause be? 
  • What is the practical impact of general and specific language in an arbitration clause?
  • How specific should the arbitration agreement be in agreeing the procedure for appointing the tribunal?
  • What factors go into selecting the tribunal?

When considering which institution and set of institutional rules to choose, consider:

  • Reputation
  • Fee structure
  • Case management practices
  • Maturity of arbitration rules
  • Any specific ‘opt in’ or ‘opt out’ provisions within those rules
  • Availability of summary procedures
  • The institutions experience with complex projects/transactions

In preparing an arbitration clause, the drafting lawyer should keep in mind the following general suggestions:

  •  Do not blindly accept the opposing parties’ suggestions for an arbitration institution
  • Do review and advise the client on the current rules of arbitration for the proposed arbitral institution but note that the rules applicable to the arbitration will most likely be those in force at the time of the dispute and may have changed since the arbitration agreement was entered into
  • Do advise the client on the benefits and burdens of the proposed arbitral institution including the cost implications of their choice
  • Do advise the client on the enforcement record for arbitration awards in the opposing parties’ jurisdiction(s)/the known location of any assets
  • Do negotiate the specific terms concerning choice of institution  and choice of law
  • Do negotiate the location for the place or seat of arbitration
  • Depending upon the particular circumstances, do negotiate the terms and conditions that amend or supplement the proposed institution’s rules of arbitration in regard to:
    • arbitrator selection procedures, including a requirement of neutrality of nationality for the presiding arbitrator
    • arbitrator selection from outside an approved list
    • discovery and evidence gathering (such as consent to the application of the Rules on the Taking of Evidence in International Commercial Arbitration adopted by the International Bar Association);
    • exchange of lists of witnesses and documents at a time well in advance of hearings
    • size of tribunal in relationship to size of potential claim
    • prohibition on punitive damages
    • prohibition on the power of the arbitrators to render a decision based on equity principles
    • awards of attorneys’ fees and costs
    • access to the courts of the seat for provisional relief and
    • language of the proceedings

The overall lesson to learn is to exercise common sense and foresight in preparing an arbitration agreement; otherwise, the parties will end up disputing their dispute resolution procedures before they can resolve their underlying dispute.

James Zimmerman is the Office Managing Partner for the Beijing office of the international law firm of Sheppard Mullin Richter & Hampton LLP. He is a former chairman of the American Chamber of Commerce China, and was elected and served as the organisation’s Chairman for two terms (2007, 2008) and Vice Chairman for two terms (2005, 2006).

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