There is no question that international commercial arbitration is becoming, more and more, a preferred method of resolving large scale international business disputes. In crafting clauses that could lead to such arbitrations, parties may opt either to follow the rules of one of the major international arbitration institutions or to create their own ad hoc rules. In either case, there is great flexibility—even if the parties choose to follow the rules of an institution, those rules remain broad by design and continue to give considerable leeway to arbitrators. Left unchecked, this flexibility can create uncertainty and risk.
Carefully drafted customized arbitration provisions can effectively eliminate some of this uncertainty and, in the process, reduce costs and improve a party’s chances for a successful result. This article contains suggestions for terms to consider including in a customized international arbitration clause, from the basic—defining which disputes are covered—to the more complex, such as defining methods of calculating damages or how appeals can be pursued.
Defining Which Disputes Are Covered
Starting with the basics, it is worth considering whether to clarify which types of disputes are covered when drafting an international arbitration clause. Where there is ongoing litigation and the parties wish to arbitrate only discrete issues, those issues must be clearly identified. Similarly, where the parties believe certain types of disputes could arise that should not be arbitrated, these carve-outs should be made explicit to eliminate doubt. The parties might also want to specify time limits for filing an arbitration, and, to avoid undue delay in the arbitration itself, apply time limits for completion of the arbitration hearing that are tied directly to the jurisdiction of the arbitrators.
Defining the Relief Arbitrator(s) Can Provide
This is arguably the most important aspect of a customized arbitration clause. Questions and doubts concerning international arbitrations often center on the broad powers the arbitrators claim to have to award any relief, rationally related to the contract, that they consider fair—even if no party requested it. A customized arbitration clause can address these concerns in advance by defining and limiting the types of relief the arbitrators are empowered to grant. The parties may, for example, draft particular contract provisions that describe how damages are to be calculated when disputes arise, and define the scope of the arbitrators’ powers by reference to those clauses. The parties also may construct a somewhat arbitrary damages formulation, such as a clause that requires the arbitrators to adopt one of the damages calculations submitted by the parties. The arbitrators may be given power to issue only certain types of injunctive relief (although such an award will have to be enforced by a court) or even be limited to issuing findings of fact for the parties to use to calculate present or future damages on their own. The parties thus can be creative in negotiating damage parameters, but must do so in the arbitration clause itself or run the risk that unforeseen awards will be issued at arbitration.
Formulating a Special Appeal Process
It is a common complaint that the narrow appeal standard for an international arbitration usually ensures that any award issued at arbitration will be confirmed—not vacated—by the appropriate court. As a result, parties sometimes attempt to fashion their own appeal standard in a customized arbitration clause. This has produced mixed results. In the United States, the Supreme Court rejected a clause that attempted to make an arbitration award subject to the much broader appellate standard of an ordinary legal action in United States courts on the grounds that the appellate standard for arbitrations is within the exclusive province of the legislature. Hall Street Associates v. Mattel, 552 U.S. 576 (2008). Similarly, there is a serious question as to whether the parties could, by agreement, modify the vacatur provisions of a treaty such as the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards (“New York Convention”) and still have the final result recognized by any signatory country.
In some circumstances, a customized arbitration clause may offer a viable solution to this problem by setting up an internal appeals procedure that runs its course before a final arbitration award is issued. There is precedent for this in the rules of the International Centre for Settlement of Investment Disputes (“ICSID”), which lay out such an internal appeals procedure. Still, caution must be taken. Although an internal appeals procedure avoids the potential problem of modifying established grounds for the vacatur of an award, such a procedure could run afoul of the rules of the administering institution. The rules of the International Chamber of Commerce (“ICC”) and the London Court of International Arbitration (“LCIA”) do not provide for any appeal of an arbitration award, and to the contrary expressly limit any review to the ICC or LCIA court’s approval of the award as to form. There is no precedent as to whether either court would defer this process pending an internal appeal set up by a customized arbitration clause, or consent to its administration by the assigned case administrator. Novel questions, such as choosing other arbitrators to handle the appeal, and requiring further advances of costs not contemplated by the existing cost structure of the institution, would have to be resolved in advance.
Ad hoc arbitrations, such as international arbitrations conducted under the United Nations Commission on International Trade Law (“UNCITRAL”) rules, are a different matter. Because these arbitrations are essentially self-administered, a customized appeals process in advance of the issuance of a final award does not present the same administrative complications as where the arbitration is administered by an institution.
Defining the Number of Arbitrators and Qualifications
Many international arbitrations deal with complex technical, financial or other issues as to which the arbitrators must have background knowledge in order to render a fair decision. But unless the arbitration clause sets forth the qualifications and experience that the arbitrators must have, there is no assurance that the chosen arbitrators will be so qualified. With a three-person tribunal in which each party appoints one arbitrator, the appointing party can assure that the arbitrator it appoints has the necessary qualifications—but setting forth the required qualifications and experience of arbitrators in a customized arbitration clause is the only way to assure that all the members of a tribunal will meet the desired standard. This is particularly important with regard to the appointment of the tribunal chair, or of a single arbitrator, by the chosen arbitral institution. Arbitrators for international arbitrations typically are chosen by case administrators, in accordance with the rules but with little input from the parties. If the arbitration clause itself identifies required qualifications, however, the institution will typically make a diligent effort to pick the right kind of arbitrators, and the parties may have a platform to communicate with the case administrator to assure that all arbitrator candidates meet the agreed standard. Of course, selecting the right kind of arbitrators often can be outcome determinative.
A customized clause also gives the parties the opportunity to choose the number of arbitrators. International arbitration rules typically provide for a default number of arbitrators, but this number may not be consistent with a party’s wishes. For example, a tribunal may provide more assurance of a mainstream, conservative decision, while a single arbitrator will likely allow for more expeditious scheduling of the arbitration hearing and other dates.
Specifying Rules for Document Exchange and Production
Document exchange and production is almost always the only “discovery” allowed in an international arbitration, so a party has to make it count. The most effective procedure is generally considered to be that set forth in the International Bar Association (“IBA”) Rules for the Taking of Evidence. Most arbitrators will suggest that the IBA Rules apply to the arbitration, but this does not always happen. It is not difficult to lay out effective guidelines for electronic document exchange and production in a customized arbitration clause, and it is prudent to memorialize the process. It is also important to clarify how relevant documents generated in other proceedings between the parties should be handled. For example, the parties may be involved in litigation that generated document production, but if there is a protective order for the litigation, the arbitrators may be reticent to allow such evidence absent the parties’ agreement. Here as well, a customized agreement can address in advance such avoidable doubts and uncertainties.
Expert Witness Clauses
Arbitrators invariably set forth a procedure for preparation and exchange of expert witness reports, and for taking expert testimony at the hearing, and the IBA Rules include detailed provisions regarding experts. Accordingly, it is not always essential to lay out these procedures in a customized arbitration clause. However, some details not covered by the rules, and possibly not within the contemplation of the arbitrators, deserve consideration: (i) a date in advance of the exchange of expert reports for experts to be identified and their CVs and a brief summary of the subject matter of their testimony provided; and (ii) a procedure to ensure the parties have input on any expert appointed by the tribunal.
Limits on the Ability to Craft Arbitration Clauses
There are relatively few limits on the customized arbitration provisions to which parties can agree. But there are some, and these must be considered when considering such clauses.
First, where the parties have chosen to conduct the arbitration under a particular set of arbitration rules, as opposed to an ad hoc arbitration proceeding, the rules themselves may contain certain procedures which, as a practical matter, are not subject to modification by a customized arbitration clause. Such rules may include, by way of example, the following:
1) Rules providing for supervision of the arbitration by an internal “court” or similar body. The ICC Rules (January 1, 2012) empower the ICC Court to oversee the arbitration in a number of ways, including (i) making a prima facie decision on jurisdiction (Article 6); (ii) making the final decision on any challenge of an arbitrator (Article 14); (iii) reviewing and approving the final form of the award (Article 33); (iv) determining the amount of advance deposits required of the parties to cover the arbitrator(s)’ fees and other costs of the arbitration (Article 36); and (v) extending time limits where necessary to ensure that the arbitrators, and the Court, can fulfill their responsibilities under the Rules (Articles 39, 30). The LCIA Rules also include clauses giving specific powers to the LCIA court, including (i) the power to appoint all arbitrators, and to make the final determination on any challenge to an arbitrator (Article 7,10); (ii) the power to override the parties’ agreed nominating process for the appointment of arbitrators; and (iii) the power to set and order the payment of advance deposits, to dismiss the arbitration if payments are not made by the parties as ordered, and to approve all costs assessed in the arbitration (Articles 15, 28). Where the parties had elected to have ICC or LCIA Rules govern their international dispute, it is questionable whether the ICC or LCIA courts would permit any material modification to their jurisdiction under the rules through a customized arbitration clause; and
2) Rules establishing the fundamental administrative structure to be applied to an arbitration. There are also other institutional rules so basic to the arbitration process that it is unlikely that an institution would accept any attempt by the parties to modify them. Such rules include, possibly among others: (i) the form and basic required content of a request for arbitration or answer thereto (e.g., ICC Articles 4 and 5; LCIA Articles 1 and 2); (ii) the requirement that each arbitrator be impartial and independent, and undertake procedures (such as the signing of a “statement of fairness” and continuous updates of disclosures) to assure that this requirement is met throughout the course of the arbitration (e.g., ICC Article 11; LCIA Article 5; ICSID Rule 6); (iii) the requirement that certain written procedures be followed (e.g., ICC Article 23 (Terms of Reference); ICSID Rule (memorials, countermemorials, and replies); (iv) the basic powers of the arbitrator(s) to decide their own jurisdiction and assess costs (e.g., ICC Articles 6, 14; LCIA Articles 23, 25, 28; ICSID Rule 41); (v) the format of the final award (e.g., ICC Article 31; ICSID Rule 47); (vi) the time period and grounds for seeking correction or supplementation of the award from the arbitrator(s) (e.g., ICC Article 35; LCIA Article 27; ICSID Rule 49); and (vii) the immunity of the arbitrator(s) or the arbitral court from liability (e.g., ICC Article 40; LCIA Article 31).
A second source of limits on customized arbitration provisions lies in the arbitration statutes of the jurisdiction. Many countries have arbitration statutes that should be referenced by the parties if the laws of that country would apply. Most of the arbitration procedures set forth in these statutes are subject to change by the parties’ agreement, but others, such as the standard for confirming or vacating an arbitration award, may not be. As noted, the United States Supreme Court has ruled that the parties cannot put into their arbitration clause a standard for vacating an award which is contrary to the narrow standard for vacatur set forth in the Federal Arbitration Act. Hall Street Associates, supra. Because the Federal Arbitration Act encompasses the vacatur standard of the New York Convention, this decision arguably prohibits vacatur provisions that differ from the New York Convention with respect to international arbitration awards as well. The laws of any jurisdiction that would apply to an international arbitration dispute should be checked closely for such judicially-imposed restraints on what the parties may include in a customized arbitration clause.
Finally, where a claim, and the relief for it, has been created entirely by statute, there may be a question as to whether a dispute arising under the statute is subject to arbitration even where the parties have agreed to arbitration. United States courts have recognized that actions determining certain real property rights—such as quiet title disputes and a dispute over the right of a landlord to evict a tenant (known as “unlawful detainer” actions)—are subject to strict statutory requirements and remedies that must be enforced in the courts. Such limitations will not necessarily impact the drafting of a customized arbitration clause, but wherever a claim is triggered exclusively by a statute care should be taken to ensure that there is no impediment under the applicable law to bringing the claim under the umbrella of the arbitration clause.
The rules of a game can often determine the outcome. In drafting provisions to cover international business disputes, those rules can, to a large extent, be fixed in advance. To avoid uncertainty and risk, parties may wish to negotiate such rules when crafting customized arbitration clauses in their agreements.