drafting international arbitration clauses november 2012

Drafting International Arbitration Clauses

November 2012

Gary B. Born

Wilmer Cutler Pickering Hale and Dorr LLP

Why Plan For Disputes?

• Commercial certainty and procedural advantage

– Obtain favorable forum for resolution of disputes

– Preclude litigation in unfavorable fora

– Avoid parallel litigation in competing fora

– Increase predictability

• Leverage in commercially resolving future disputes

• Avoid unnecessary delays in resolving disputes

• Maximize enforceability of company’s rights

Drafting International Arbitration Agreements Critical Elements

• Arbitration or Forum Selection Agreement?

• Institutional or Ad Hoc Arbitration?

Arbitral Institution (if any) and its Rules

• Scope of the Arbitration Clause

• Situs (or Seat) of the Arbitration

• Appointment of and Number of Arbitrators

• Language of the Arbitration

• Choice of Law Clause

• Other Modifications

Choosing the Institution

• Does the institution exist?

• Is it experienced and reputable?

• Is the institution independent or is it controlled – directly or indirectly

– by the State?

Institutional Arbitration Clauses

• The starting point can be the model arbitration clause of the

chosen institution

– ICC – www.iccwbo.org

– LCIA – www.lcia-arbitration.com

– AAA – www.adr.org

• It may be necessary or desirable to amend the institution’s

clause. Proceed with caution.

• Does the clause properly name the intended institution and its

rules?

• Does the parties’ agreement – considered as a whole – name

more than one institution?

http://www.adr.org/

Drafting International Arbitration Agreements A Badly Drafted Clause

“For all claims or disputes arising out of this agreement which could not

be amicably settled between the parties, is competent the arbitrage for

export trade at the Federal Chamber of Commerce in Beograd. In the

case that the buyer is accused, the Chamber of Commerce in New

York is competent.”

Drafting International Arbitration Agreements A Badly Drafted Clause

“All disputes arising in connection with the present agreement shall be

submitted in the first instance to arbitration. The arbitrator shall be a

well-known chamber of commerce (like the International Chamber of

Commerce) designated by mutual agreement between buyer and

seller.”

Drafting International Arbitration Agreements Model ICC Clause

“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.”

Drafting International Arbitration Agreements Model UNCITRAL Clause

“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 as at

present in force.

[(a) The appointing authority shall be …

(b) The number of arbitrators shall be…

(c) The place of arbitration shall be...

(d) The language[s] used in the arbitration shall be…]”

Drafting International Arbitration Agreements

Critical Elements



• Arbitral Institution (if any) and its Rules

Scope of the Arbitration Clause






Scope of the Clause

What Can the Arbitrator Decide?

• Scope of the arbitration agreement defines the jurisdiction of the

arbitrators

• Broad scope v. narrow scope

• Some courts hold that “arising under” language does not encompass

tort, statutory or other non-contractual claims

• Compare to scope of choice-of-law clause

Scope of the Clause

What Can the Arbitrator Decide?

• Specific exclusions possible for particular types of claims, e.g.

enforcement of IP rights, pricing adjustments, etc.

– “All disputes arising out of or relating to this Agreement, except

‘Licensed Mark Disputes’ (as defined below), shall be finally resolved by

arbitration…”

– Such provisions should be combined with forum selection clause

• Multiple parties or contracts: Are they covered? Should they be?

• Are all relevant agreements covered by the arbitration clause? “All

disputes relating to this Agreement …”

Drafting International Arbitration Agreements Modified Model ICC Clause

“Any disputes, claims or controversies arising out of, relating to or in

connection with the present contract, including any question regarding

its formation, existence, validity, enforceability, performance,

interpretation, breach or termination, 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.”


Critical Elements





Situs (or Seat) of the Arbitration





Where to Arbitrate?

[We] are reviewing a contract that proposes to have disputes arbitrated by XYZ Associates of Washington DC. The arbitration would take place in Bermuda, and the law governing the arbitration proceeding would be the Bermuda International Arbitration Act of 1993. Does anyone have an opinion as to whether there is anything unusual, desirable, or undesirable about this provision? Thanks.

Yes. My opinion is that arbitration in Bermuda is very desirable. Especially if it's a long arbitration.

not this time of year; it's hurricane season.

Why Is the Arbitral Seat Important?

• Exclusive forum for annulment actions

• Exclusive forum for judicial appointment / removal of arbitrators

• Standards of arbitrator’s independence and impartiality

• Enforcement of arbitration agreement

• Choice of law governing arbitration agreement

• Judicial non-interference

• Judicial support for arbitral process (e.g., provisional measures,

disclosure)

• Legal standards for fairness / conduct of arbitral proceedings

• Effect on selection of presiding arbitrator, arbitral procedures, choice

of law

Importance of the New York Convention

• United Nations Convention on Recognition and Enforcement of

Foreign Arbitral Awards (New York Convention, 1958)

• Under the New York Convention (and most national laws) there are

very limited bases for challenging an agreement or award

Importance of the New York Convention

• Ratified by over 145 countries

• Palestine is not a signatory to the Convention, but awards rendered

in Convention countries are enforceable in other Convention

countries

• Most of the countries in the Middle East have ratified the Convention

(notable exceptions include Yemen and Iraq)

Preferred Arbitral Seats

• Country that has implemented the NY Convention

• With national legislation hospitable to and supportive of international

arbitration:

– enforceability of arbitration agreements

– freedom of parties to choose counsel and arbitrator(s)

– minimal judicial review of awards

– minimal supervision of arbitrators and judicial interference

– court assistance in aid of arbitration

– (UNCITRAL Model Law)

• Appropriate logistics / infrastructure

• Beneficial or neutral forum for particular party

• Political stability and judicial independence

Number of times

agreed by the

parties

Number of times

fixed by the

Court

Total

FRANCE 109 15 124

SWITZERLAND 79 7 86

UNITED KINGDOM 66 4 70

UNITED STATES 42 2 44

GERMANY 24 3 27

SINGAPORE 23 1 24

CHINA 11 3 14

MEXICO AUSTRIA

12 11

1 2

13 13

UNITED ARAB EMIRATES

8 4 12

BRAZIL 11 0 11

Places of Arbitration in ICC Proceedings 2010

Other Factors In Choosing Arbitral Seat

• Effect on choice of presiding / sole arbitrator

• Effect on choice of co-arbitrators

• Effect on procedures, language and conduct of arbitration

• IMPORTANT: Exercise caution in any agreement selecting

“procedural law” of the arbitration

Drafting International Arbitration Agreements Modified Model ICC Clause





Rules of Arbitration of the International Chamber of Commerce by one

or more arbitrators appointed in accordance with the said Rules. The

[place][seat] of the arbitration shall be [London, England][Singapore].”


Critical Elements






Appointment of and Number of Arbitrators




Number of Arbitrators

• Agree on the number of arbitrators (1 or 3; not 2, 4, 5)

• Unless disputes are likely to be small, it is generally preferable to

have three arbitrators

• Possibility of tiered approach (1 arbitrator for small disputes; 3

arbitrators for larger disputes (e.g., >$3 million)

• Agree on procedure to appoint chair

• Consider the institutional default rule -- the leading institutional and

UNCITRAL Rules contain acceptable procedures for the

appointment of arbitrators


Modified Model ICC Clause





Rules of Arbitration of the International Chamber of Commerce by three

arbitrators appointed in accordance with the said rules.* The place of

the arbitration shall be London, England.”

* Consider providing that the party appointed arbitrators can nominate the

chairman.


Critical Elements







Language of the Arbitration



Language of Arbitration

• Essential element

• Affects clients’ ability to monitor / participate and choice of counsel

• Affects choice of arbitrators and presiding arbitrator

• Bilingual proceedings possible, but cumbersome

• Agreement regarding translation possible fall-back


Critical Elements





Rules of Arbitration of the International Chamber of Commerce by three

arbitrators appointed in accordance with the said rules. The place of the

arbitration shall be London, England. The language of the arbitration

shall be English.”


Critical Elements








Choice of Law Clause


Choosing the Governing Law

• There can be multiple laws “governing” aspects of a contract and

related disputes. E.g.:

– The law or rules governing the substantive issues in dispute (including

mandatory laws in the place of performance and at the seat of

arbitration)

– The law governing the arbitration agreement

– The law(s) governing recognition and enforcement of an award

• Here, referring to the law or rules governing the substance of a

dispute – also referred to as the applicable law / substantive law /

proper law / law governing the underlying contract


ICC Data 2009

• 12% of contracts no choice of law

• 88% of contracts parties chose the law:

– in 10 contracts the parties opted for non-State laws (CISG, UNIDROIT,

ICC Incoterms and EC law)

– State law chosen in all other contracts

• When law of a State was chosen, choices covered laws of 91

different States (English 14.3%, Swiss 13.1%, French 7.2%, US

7.1%, German 6%, Brazilian 2.6%).

• Parties often choose the law of a third country


Queen Mary Data 2010

• If they can, parties want to choose their own law

• When they can’t, surveys show –

– English

– Swiss

– NY

– French

– US law (other than NY)

– Other


• The law chosen should be a developed, stable and commercially

sophisticated law -- and accessible

• The law should be beneficial or neutral

• Scope should be broad and match dispute resolution clause

• May determine important construction / interpretation principles


• Avoid references to “General Principles of Law” or similar

formulations. These are uncertain and raise enforceability issues

• Avoid references to multiple laws

• Consider in advance the effects on the parties’ substantive

agreement (including “implied terms” or “mandatory rules”)

– may affect the commercial balance of the agreement and more (e.g.,

invalidity)

– mandatory law may address insolvency, competition, other regulatory

matters, including tax/VAT, environment, health, safety,

labor/employment

Governing Law Clause

“This Agreement, and any disputes, claims or controversies in relating

to or in connection with this Agreement, including any question

regarding its formation, existence, validity, enforceability, performance,

interpretation or termination, shall be resolved in accordance with the

laws of the [ADD] without regard to its conflict of laws rules.”

The International Arbitration Agreement and Governing Law Clause

“Any disputes, claims or controversies arising out of, relating to or in connection with the

present contract, including any question regarding its formation, existence, validity,

enforceability, performance, interpretation, breach or termination, shall be finally settled

under the Rules of Arbitration of the International Chamber of Commerce by three

arbitrators appointed in accordance with the said rules. The place of the arbitration shall

be London, England. The language of the arbitration shall be English.”

“This agreement will be governed by and any disputes, claims or controversies in

connection with this Agreement, including any question regarding its formation,

existence, validity, enforceability, performance, interpretation or termination, shall be

resolved in accordance with the laws of the State of New York without regard to its

conflict of laws rules (other than Section 5-1401 of the General Obligations Law of the

State of New York).”


Other Possible Elements

• Formalities, Capacity, Validity and Sovereign Immunity

• Arbitrator Qualifications and Selection

• Preliminary and Interim Measures

• Discovery/Disclosure and Evidentiary Rules

• Pre-arbitration Notice and/or ADR, i.e., negotiation, mediation, etc.

• Confidentiality

• Interest

• Costs and Legal Expenses

• Accelerated Timeframes/Fast-track

• Consolidation and Joinder

• Right of Appeal/Judicial Review




Method of Selection, Qualifications, Nationality and Independence of

Arbitrators



• Pre-arbitration Notice and/or ADR

• Confidentiality

• Interest





Arbitrator Qualifications and Selection

• Possible to agree that the arbitrators should have particular legal

expertise, industry / technology-specific experience, nationality,

language skills, and other qualifications (or selected by third party

appointing authorities (institutes, etc))

• IMPORTANT:

– Be sure that qualifications are appropriate for all potential disputes that

could arise

– Be careful not to unduly restrict the pool of potential arbitrators

• Consider nationality requirement for presiding/sole arbitrator

• General requirements of neutrality / independence and impartiality --

policed by disclosure obligations




• Arbitrators Qualifications and Selection


Discovery/Disclosure and Evidentiary Rules


• Confidentiality

• Interest





Discovery / Disclosure

• Common law and civil law systems apply different standards to pre-

trial discovery / disclosure

• In international practice, wide-ranging US-style discovery typically

not available – depositions generally not available

• Possible to broaden or narrow the scope of disclosure available to

the parties in the arbitration agreement -- consider own future

position

• Increasingly harmonized standards: IBA Rules of Evidence in

International Arbitration (revised 2010)

Discovery / Disclosure

Broad clause:

“The parties shall be entitled to engage in discovery as provided by the

U.S. Federal Rules of Civil Procedure.”

Narrower:

“At the request of a party, the Tribunal shall have the discretion to order

the disclosure to specified documents. Such a request shall identify the

documents with a reasonable degree of specificity and establish the

relevance [and materiality] of the documents to the arbitration.”

Exclusion:

“The parties shall not be entitled to discovery, and the Tribunal shall

have no power to order discovery of documents, [oral testimony] [or

other materials].”







Pre-arbitration Notice and/or ADR, i.e., negotiation, mediation, etc.

• Confidentiality

• Interest





Pre-Arbitration Clauses

Caught in a Loop?

• Read carefully -- is there a risk that the added procedure (i.e., fast

track, carve out, ADR provisions) will result in a “procedural loop” or

divest the tribunal of jurisdiction?

• Are there (reasonable) time limits?

• Is there a mechanism for resolving impasses?

Pre-Arbitration Clauses A Badly Drafted Clause

“All disputes arising in connection with the present agreement should

be resolved by negotiation and friendly settlement. If this method or

resolution should be impracticable, the disputed questions shall be

decided in accordance with the Rules of the ICC in Paris. In the event

the proceedings were not able to decide the question for any reason

whatsoever, the judicial courts of the injured party shall decide the

dispute on a legal basis.”

Pre-Arbitration ADR Clause A Model Clause

“All disputes relating to this Agreement shall be referred to

management representatives of the parties for resolution. If such

representatives are unable to resolve any dispute(s) referred to them

within [30] days of referral, either party may submit such dispute(s) to

arbitration in accordance with the provisions of Article [__] hereof.”

Pre-Arbitration ADR Clause A Model Clause

“If a dispute, controversy, or claim arises out of or relates to this

contract, the parties agree to first submit it to mediation administered by

the American Arbitration Association under its Commercial Mediation

Rules before resorting to arbitration. Thereafter, any unresolved

dispute, controversy, or claim arising out of or relating to this contract

shall be referred to arbitration administered by the American Arbitration

Association in accordance with its Commercial Arbitration Rules.”








Confidentiality

• Interest





Confidentiality

• Not necessarily provided by national law

• Not provided for by many arbitral rules. (Cf. LCIA Rules Art. 30,

CAM Rules Art. 8, WIPO Rules Art. 73-76)

• What is confidential? Regulatory limits (e.g., SEC requirements)?

• Consider need for separate confidentiality undertaking covering:

– fact of dispute / arbitration

– information disclosed during arbitration

– arbitration award

– settlement discussions

Confidentiality

“The parties to an arbitration shall keep the arbitration confidential and

shall not disclose to any person, other than those necessary to the

proceedings, the existence of the arbitration, any information submitted

during the arbitration, any documents submitted in connection with it,

any oral submissions or testimony, transcripts, or any award unless

disclosure is required by law or is necessary for permissible court

proceedings, such as proceedings to recognize or enforce an award.”








• Confidentiality

• Interest

Costs and Legal Expenses




Costs and Expenses Loser Pays

“The prevailing party shall be entitled to recover its [reasonable] costs,

including administrative fees and expenses, arbitrators’ fees and

expenses, and fees and expenses of legal representation, incurred in

the arbitration proceedings.”

OR

“The arbitral tribunal shall award to the prevailing party, if any, all of its

costs and fees. ‘Costs and fees’ mean all reasonable pre-award

expenses of the arbitration, including the arbitrators’ fees,

administrative fees, travel expenses, out-of-pocket expenses such as

copying and telephone, court costs, witness fees, and costs of legal

representation in the arbitration.”

Costs and Expenses Parties Bear Own Costs

“Notwithstanding any provision to the contrary in the [ICC Arbitration

Rules], each party shall bear its own costs and expenses, including

fees for legal representation.”

OR

“The fees and expenses of the arbitrators shall be borne in equal

shares by the parties. Each party shall bear the fees and expenses of

its legal representation in the arbitration. The arbitral tribunal shall not

reallocate either the fees and expenses of the arbitrators or of the

parties’ legal representation.”

International Arbitration

Trends

• Increasing use of specialized international arbitration practices

made up of common law and civil law lawyers

• Increasing range of subjects being arbitrated -- e.g., competition law

(antitrust) and IP

• Broader use of arbitration worldwide -- Latin America, Eastern

Europe, China, Middle East

• Increasing use of arbitration in disputes with State entities and in

international investment disputes -- BITs, ICSID, NAFTA

• Multiple parties or contracts

International Dispute Resolution

Gary Born

Wilmer Cutler Pickering Hale and Dorr LLP

London

[email protected]

+44 (0)207 872 1000

drafting international arbitration clauses november 2012

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