While arbitration offers an excellent means for parties to get their disputes settled faster than in traditional courts, how you draft the arbitration clause in a document is critically important for a positive outcome – should a dispute arise.
Legal agreements often have a clause indicating that parties agree to settle any disputes arising from the arrangement in arbitration. The text for this clause is frequently supplied by a local arbitration institute. Many lawyers in the jurisdiction assume that the text reflects market practice and are reluctant to alter its contents.
But while a standard arbitration clause appears complete on first blush, deeper investigation reveals its potential pitfalls. Before you agree to arbitrate when drafting a contract, there are some things you should keep in mind.
Rather than give the power to appoint arbitrators to an outside institute, parties are better off to keep this power. By doing so, litigants can make sure to appoint the most qualified arbitrators to hear their case. The parties themselves understand the facts better than anyone else and can pick arbitrators with the exact experience needed to settle the dispute in the most competent way.
It is often said that arbitration allows parties to have their dispute heard by arbitrators with intimate experience in their business sector and the disputed facts. Yet while arbitration institutes undertake good-faith efforts to find the most qualified arbitrators for the particular case, the institutes are also guided by other criteria – such as fair distribution of appointments to all candidates, gender equality and making sure to bring up the next generation of arbitrators.
For disputes where the interest is relatively small, say, 0.5 million euros or less, an arbitration institute may use this as a good opportunity to allow less experienced arbitrators decide the case. While from the institute’s perspective this is reasonable and sound, the litigants are likely to want the person with the maximum business background and legal knowledge – and not the person with limited experience but great potential.
Another thing to consider is the number of arbitrators that you agree to in your arbitration clause. It is a common misunderstanding that one arbitrator is sufficient and that the competence among arbitrators is equal.
The downside is that, when left alone to decide a dispute, an arbitrator’s thought processes may veer away from the relevant facts, resulting in judgments that the arbitrator may consider brilliant but the parties find irrelevant. As arbitration disputes, generally speaking, offer no right to appeal, parties may end up with a judgment that is unfair and grossly incorrect.
Parties sometimes think that appointing only one arbitrator is a good way to save money on the cost of the arbitration. But it is important to remember that the cost of the litigators far outweighs the costs of the arbitrators. In essence, a decision to have just one arbitrator is money that is misplaced.
Agreeing to appoint three arbitrators helps to ensure a more just outcome. When one arbitrator starts to process ideas that are off-track, the other two can serve to reject these concepts and get the dispute moving toward a more reasonable outcome – unanimously.
It is fairly common to see time limits in arbitration clauses. These clauses may state that the award should be given within, for instance, six months following the appointment of the arbitrators. Such time limits are needless, as they usually hinder sufficient usage of time for both the litigators and arbitrators. The parties could, of course, agree to dismiss the time limit, but rather often one of the parties is not willing to co-operate, as they have a contradictory interest toward the smooth continuance of the arbitration proceedings.
So, while an arbitration clause is a great thing to include in agreements, please, think the text over very carefully.