Drafting arbitration clauses in 2021 and beyond - top tips

Drafting arbitration clauses in 2021 and beyond - top tips
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There have been a lot of developments in arbitration law in 2020 and 2021 with many important reported cases and changes to institutional rules. Where does this leave the drafter of arbitration clauses?

Whatever uncertainties continue over cross-border enforcement of court judgments post-Brexit no such doubts exist over the enforcement of arbitral awards: they are unaffected by Brexit. This has resulted in closer scrutiny of whether court jurisdiction clauses remain fit for purpose. It has also meant that more parties are looking at arbitration as their preferred means of international dispute resolution.

Those familiar with arbitration understand the significance of the agreement to arbitrate and there is plenty of guidance available to assist parties and their lawyers to draft effective arbitration clauses.

Specifying the governing law of an arbitration clause

An agreement to arbitrate (although outwardly a clause in a ‘host’ contract) has long been regarded as a separate contract by reason of the doctrine of separability. The separable contract was described in Bremer Vulkan v South India Shipping [1981] by Lord Diplock as “a self-contained contract collateral or ancillary to” (emphasis added) the shipbuilding contract in which it was found. Lord Scarman described it as “a separate contract ancillary to the main contract” (emphasis added). In Paal Wilson v Partenreederei Hannah Blumenthal [1983] Lord Diplock further said “an arbitration clause is collateral to the main contract in which it is incorporated and it gives rise to collateral primary and secondary obligations of its own”.

However, in Enka v Chubb [2020] the Supreme Court made it clear that the separability doctrine only arises when it might be said that the separable agreement to arbitrate might be invalid, non-existent or ineffective because the ‘host’ contract is invalid, or did not come into existence or has become ineffective.

This ought to reduce some of the practical importance of separability but it nevertheless will remain important in the circumstances of the host contract being invalid etc. As a separate contract the arbitration clause will, just like any other contract, have its own governing law. If there is a dispute over the scope or validity of an arbitration clause, that dispute with be resolved by applying the governing law of the arbitration agreement.

In Enka v Chubb [2020] the Supreme Court held that, where the parties have not chosen a governing law of the arbitration clause but have chosen, expressly or impliedly, the governing law of the main contract, that law will also govern the arbitration agreement unless the application of that law would invalidate or significantly undermine the arbitration agreement (the ‘validation principle’).

This appears to be a clear statement of the English common law principles for determining the governing law of an arbitration clause but it may not straightforward to apply those principles in practice. To avoid uncertainty, the best advice still is to include an express choice of the law

governing the arbitration clause.

Top tip: have an express choice of law for the agreement to arbitrate e.g. “Any dispute arising out of or in connection with this contract shall be decided by arbitration …. This agreement to arbitrate shall be governed by the laws of [England]”.

Arbitrators: qualifications, impartiality and multiple appointments

One of the advantages of arbitration is that parties often have an opportunity to select an arbitrator of their choice (or at least influence the choice).

Over-specifying the attributes of an arbitrator in the arbitration clause can significantly limit the available pool. It can also increase the chances of challenges to the appointment of an arbitrator on the basis that the person appointed does not meet the requirements set out in the clause.

Although it is relatively rare to see a specific arbitrator named in an arbitration clause, B v J [2020], illustrated the problems that this can create. The named arbitrator had worked for some of the respondents for a number of years but resigned after the arbitration notice was issued. An unsuccessful application was made to remove the arbitrator, even though he was specifically named in the arbitration clause, on the grounds that he would not be able to act impartially.

Top tip: do not name a specific arbitrator or overly restrict the potential pool of arbitrators in the arbitration clause. Institutions are very experienced in making appointments, trust them to appoint in light of the dispute that has arisen.

Repeat appointments can be both good and bad. An arbitrator skilled in the subject-matter may be quicker, cheaper and give a decision more consistent with precedent and industry practice. However, there may be an impression that information from one arbitration might subconsciously affect a decision in another and give rise to an appearance of bias. In Halliburton v Chubb [2020] the Supreme Court considered arbitrator impartiality and held that an arbitrator has a legal duty of disclosure in multiple references concerning the same or overlapping subject-matter with one common party.

Top tip: arbitrators will be making greater disclosures. Consider them carefully and do not be afraid to ask for more information or supplemental disclosures to decide whether to accept a nominee. Your right to object will be lost if you do not object promptly.

However, the Supreme Court also held that there may be circumstances in which no duty of disclosure would arise because of the custom and practice of particular industries such as maritime, sports and commodities “and maybe others”, where multiple or repeat appointments are a part of the process which is known to and accepted by the participants.

Top tip: consider whether your industry has any accepted practice; seek specific disclosures from nominees and consider reciting in Terms of Reference or Procedural Order No. 1 what disclosures were expected and given.

Some matters referred to arbitration, some not

Some disputes clauses refer some disputes to arbitration and other disputes to, say, courts or expert determination. There can be a variety of reasons for this, such as perceived speed (the ability to seek summary judgment in court) or expertise (an accountant to look at accounting issues). Such clauses can create problems. In AdActive Media Inc v Mark Ingrouille [2021], Ingrouille was engaged by AdActive as a consultant. The consultancy agreement contained clauses that referred all disputes to arbitration with the exception of disputes relating to confidential information and Ingrouille’s “work product”. Those excepted disputes were to go to court litigation in California. AdActive brought a claim in California, obtained judgment and sought to enforce in England. The Court of Appeal held the claim was contrary to the arbitration clause because it covered more than misuse of confidential information. Only the allegation relating to confidential information should have been brought in the Californian court, and the other allegations should have been made in arbitration. As a result, the judgment could not be enforced in England. Further, in Helice Leasing SAS v PT Garuda Indonesia (Persero) TbK [2021] the Court held that in an agreement that both referred all disputes to LCIA arbitration and also permitted court action in the event of default, the reference to “court action” was to the court in the London Court of International Arbitration.

Top Tip: consider carefully whether split disputes mechanisms are really necessary and desirable and, if so, spell out precisely what you mean (e.g. do not refer to court – rather refer to e.g. the High Court of Justice) and be vigilant that any claim meets the agreed division. You might need both arbitration and court action – which could prove unnecessarily expensive and time-consuming.

Pre-conditions to arbitration

In Republic of Sierra Leone v SL Mining [2021] the High Court declined to set aside an arbitral award, despite the fact that the Defendant had allegedly failed to comply with certain pre-conditions to arbitration agreed in a multi-tiered dispute resolution clause.

This should not encourage complacency: you should not ignore such provisions. Issues of whether a claim has been brought prematurely are questions of admissibility and that is decided by the arbitrators – a claim may well be rejected if premature.

Top tip: consider carefully whether pre-conditions are necessary and desirable (and what happens if limitation is imminent). Over prescriptive conditions can be a trap for the unwary and conditions that are too vague are probably unenforceable.

Emergency arbitrator / expedited formation

Most institutional rules now provide for an emergency arbitrator or expedited formation of the tribunal e.g. Articles 9A and 9B of the LCIA Rules 2020. Each of these is designed to permit rapid interim measures (e.g. an injunction).

In Gerald Metals SA v Timis [2016], the High Court considered its power to grant urgent relief under s 44(3) of the Arbitration Act 1996 in circumstances where timely and effective relief could have instead been granted by an expedited tribunal or emergency arbitrator under the LCIA Rules 2014.

Under s 44(3), the court may, in cases of urgency, make orders or grant injunctions in support of arbitration proceedings. However, s 44(5) provides that the court may only act to the extent that the arbitral tribunal (or other person or body vested with power in that regard) has no power or is unable for the time being to act.

In Gerald Metals, the Court held that where there is sufficient time for an applicant to obtain relief from an expedited tribunal or emergency arbitrator under the Rules, it does not have power to grant urgent relief. There have been some minor changes to the LCIA Rules subsequent to Gerald Metals but these may be unlikely to change the result.

Top tip: if you think it likely that you may need very urgent protection (where only the court could act quickly enough) you may wish to consider deleting the emergency arbitrator or expedited formation of the tribunal provisions.

“Summary judgment”

One of the perceived disadvantages of arbitration compared to litigation has often been the perception that “summary judgment” is not available in arbitration. Many commentators have insisted that the power is there and tribunals need to be confident to use that power. Some institutions (e.g. SIAC, HKIAC) have expressly provided for summary dismissal or early determination in their rules, and others have confirmed (e.g. ICC) in a practice note that such a power exists. The LCIA has now in its 2020 Rules also included an express power of “Early Determination” for cases that were “inadmissible or manifestly without merit”.

Top tip: whilst the power of “summary judgment” is almost certainly available under most of the established institutional rules, the specific mention in the LCIA Rules may embolden tribunals to use the new tool in the toolbox and might be an additional justification to stipulate the use of the LCIA Rules.

Joinder and consolidation

One of the perceived advantages to arbitration is that it is confidential. Unlike a public courtroom, disputes can be resolved out of the public eye. There is, however, undoubtedly a trend towards greater flexibility in the ability to join ‘third parties’ and to consolidate two or more arbitrations. For example, the new LCIA Rules 2020, which historically had been viewed as being quite restrictive in terms of the circumstances in which consolidation could be sought, now permit a more liberal interpretation. Article 22.7(ii) allows for the tribunal to consolidate arbitrations under compatible arbitration agreements between “the same disputing parties or arising out of the same transaction or series of related transactions“: giving opportunities for consolidation in a far wider set of circumstances. This expansion has also been applied to the powers of the LCIA Court under Article 22.8(ii) to consolidate prior to the appointment of a tribunal. Also new is Article 22.7(iii), which provides for a tribunal to conduct arbitrations concurrently in similar circumstances and where the same tribunal is constituted in respect of each arbitration.

Similarly Article 7 has been changed in the ICC Rules 2021. A new Article 7(5) allows for a Request for Joinder to be made after the appointment of any arbitrator (previously joinder was only possible before appointment of the tribunal). The tribunal, once constituted, may now decide on that Request, taking into account all relevant circumstances, including whether the tribunal has jurisdiction over the additional party, the timing of the Request, possible conflicts of interest and the impact of the joinder on the arbitral procedure. The additional party must also accept the constitution of the arbitral tribunal and agree to the Terms of Reference. Practically speaking, the impact of this change may be minor: all it will allow is a Respondent to join a willing co-respondent without the express agreement of the Claimant party (providing the tribunal considers it appropriate in the circumstances). In Article 10, the 2021 ICC Rules now tidy up an open question under Article 10(b) as to whether consolidation was only possible where all the claims in the arbitration were made under “the same arbitration agreement” (i.e. the same contract), or also allowed for consolidation under multiple agreements with mirror arbitration clauses. The 2021 ICC Rules now confirm that consolidation may happen where “all of the claims in the arbitrations are made under the same arbitration agreement or agreements”.

Top tip: joining additional parties or consolidating can be very useful, or disruptive and concerning, depending on your perspective. Not knowing what claim might arise and whether you or an opponent may wish to join means it is difficult to pre-plan but be aware of the trend and, if concerned, you should draft specific provisions.

Pandemic-influenced changes

The pandemic has driven innovation in increased virtual hearings and greater electronic communications. The modernisation of institutional rules seeks to reflect and codify these changes.

For example, the 2020 LCIA Rules include new Articles 14.5 and 14.6 which clarify (but not necessarily limit) what the “widest discretion” entails in terms of procedure, including shortening timescales, limiting evidence, restricting pleadings, and adopting technology. Article 19 allows the tribunal discretion to order a virtual hearing, or a combination of remote and in person attendance. In doing so, the LCIA has chosen to ‘future-proof’ its Rules with the use of the term “other communications technology”, to allow for remote hearings technology to continue to evolve over time. Article 26 now permits an award to be signed electronically and/or in counterparts which are assembled into a single document.

Furthermore, the 2021 ICC Rules follow a similar approach to the 2020 LCIA Rules in acknowledging the reality of modern practice, particularly during the pandemic. Article 26.1 has undergone a rewrite and now provides that “the arbitral tribunal may decide, after consulting the parties, and on the basis of the relevant facts and circumstances of the case, that any hearing will be conducted by physical attendance or remotely by videoconference, telephone or other appropriate means of communication”.

The 2021 Rules have also shifted away from a presumption that pleadings and written communications will be submitted in hard copy in multiple sets for each party, each arbitrator and the ICC Secretariat. Article 3.1 now merely provides for pleadings and written communications to be “sent” to each party, each arbitrator and the ICC Secretariat, and that the ICC Secretariat be copied into communication from the tribunal.

Top tip: arbitration is moving with the times to provide the appropriate service to its users. There will rarely be an obstacle to an efficient process.

Other LCIA rule changes

Composite requests and responses

The court’s decision in A v B [2017] confirmed that the LCIA Rules 2014 did not permit a party to commence a single arbitration in respect of disputes under multiple contracts. Other arbitral institutions have allowed for the issue of single requests for multiple disputes in certain circumstances for a number of years. The changes to Article 1.2 of the LCIA Rules allow for composite Requests for Arbitration to be issued in order to commence multiple arbitrations (under certain circumstances) at once. While the issuance of a composite Request may be accompanied by a request for consolidation of those disputes, consolidation is not automatic.

Timescales

There has been some tightening in the timescales, with 28 days rather than 35 days for the LCIA to appoint the tribunal in Article 5.8, and an assumed three-month timescale for the release of the Award in Article 15.10.

Other ICC rule changes

Third party funding

The 2021 Rules introduce a significant new provision into Article 11 regarding the independence, impartiality and conflicts of interests of the tribunal. New Article 11.7 states that “in order to assist prospective arbitrators and arbitrators in complying with their duties under Articles 11(2) and 11(3), each party must promptly inform the Secretariat, the arbitral tribunal and the other parties, of the existence and identity of any non-party which has entered into an arrangement for the funding of claims or defences and under which it has an economic interest in the outcome of the arbitration”.

However, the provision is quite narrowly worded and could, arguably, not extend to certain funding arrangements such as insurance. The ICC is taking a different approach to the more expansive language of the HKIAC (Article 44) which requires the disclosure of any “funding agreement”.

Party representation

The title of Article 17 has been changed to “Party Representation”, and there are a number of new additions to the wording. Each party is now required to promptly inform the Secretariat, tribunal and other parties of any changes in its representation. New Article 17.2 follows the approach taken in the LCIA Rules 2014 in allowing an arbitral tribunal to “take any measure necessary to avoid a conflict of interest of an arbitrator arising from a change in party representation, including the exclusion of new party representatives from participating in whole or in part in the arbitral proceedings”. Like the addition to the LCIA Rules before it, this will be quite a controversial provision: even though the tribunal must have regard to all the circumstances, the tribunal is expressly empowered to limit a party’s ability to appoint legal representatives of its choice. However, the intention behind the provision – namely, to address ‘tactical’ appointments designed to derail the proceedings through introducing conflicts of interest – is sound.

Inequality of tribunal appointment: ICC Court discretion

Under new Article 12.9 the ICC Court now has a fall-back discretion “in exceptional circumstances” to deviate from any agreement by the parties on the method of constitution of the arbitral tribunal, and for the ICC Court to appoint the entire tribunal. The new provision states that this power may be invoked “to avoid a significant risk of unequal treatment and unfairness that may affect the validity of the award”. The ICC Rules led the way in ensuring that arbitral rules provide for the principle of equality in the appointment of arbitrators following the French case of Siemens v Dutco [1992].

London Chamber of Arbitration and Mediation

The London Chamber of Arbitration and Mediation (LCAM) has been founded under the auspices of the London Chamber of Commerce and Industry, the capital’s largest independent business network and business support organisation, to provide efficient, innovative and cost-effective and alternative dispute resolution services to the business community. It is worthy of consideration as an arbitral institution as an alternative to the more established market participants.

JAMS

JAMS (Judicial Arbitration and Mediation Services) is a well-respected North American based institution which, as its name implies administers arbitration and mediation. Some of its ‘neutrals’ own shares in the institution, so as well as being remunerated as arbitrator / mediator, they benefit from work generally passing through JAMS. In Monster Energy v City Beverages [2019] a US Court set aside an award after the arbitrator omitted to disclose his ownership interest, especially in light of the “more than trivial” volume of Monster’s business with JAMS. This is not a reason not to use JAMS, rather be vigilant that all proper disclosures have been made by the neutral.

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