Arbitration Clauses: Key to Efficient and Confidential Dispute Resolution in Commercial Agreements

Arbitration Clauses

Nature and Purpose

Arbitration clauses are contractual clauses, often included in commercial agreements between parties, to provide commercial arbitration as an alternative dispute resolution mechanism to orthodox court proceedings (Arbitration Clause), and typically binds parties to agree to commercial arbitration proceedings for the purposes of attempting to resolve all or certain disputes (Arbitration Agreement) that arise, or may arise, in relation to a matter contemplated under a commercial agreement between them.

Parties to a commercial agreement will often include an Arbitration Clause for a range of reasons, but the underlying reasons usually include greater procedural flexibility (as compared with court proceedings), privacy and/or confidentiality concerns, cost or the need for expedient resolution of disputes.

It is noted in the case of John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] that a fundamental purpose underlying Arbitration Clauses and Arbitration Agreements is to “facilitate and promote the use of arbitration and to minimise judicial intervention in the process”.

Similarly, it is noted in the case of United Group Rail Services v Rail Corp NSW [2009] NSWCA 177 that Arbitration Clauses are used to encourage the “resolution of disputes without expensive litigation”.

It is important to ensure that an Arbitration Clause is comprehensively and validly drafted to ensure enforceability and avoid disputes arising in relation to the Arbitration Agreement itself.

Commercial Arbitration Act 2010 (NSW) (“Arbitration Act”)

In Australia, commercial arbitrations are regulated by relevant legislation in all the various Australian state and territory jurisdictions, and the legislation across such jurisdictions is “uniform” (Uniform Law).

For the purposes of this insight, we focus on commercial arbitrations in NSW which are regulated by the Arbitration Act, of which sets out inter alia the following:

(In Writing – s7(1)) under section 7(1), an Arbitration Agreement must be in writing;

(Valid Form – s7(2)) under s7(2), an Arbitration Clause is a form in which an Arbitration Agreement can validly exist; and

(Court’s Referral Obligation – s8) under s8, if a dispute, under a commercial agreement that contains an Arbitration Clause, is brought before a Court by way of commencing a legal action, the Court is required to “refer the parties to arbitration” unless “the agreement is null and void, inoperative or incapable of being performed”.

If you are interested in the legislation regulating commercial arbitrations in a different Australian jurisdiction, please don’t hesitate to contact us.

Independent Obligations

In accordance with Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854, an Arbitration Clause is distinct from the commercial agreement that it is contained in in that it gives rise to “obligations of its own”.

Consequently, an invalid contract does not subsequently render an Arbitration Clause (contained within such contract) as similarly invalid.

Moreover, there are limited grounds to challenge the validity of an Arbitration Clause itself, of which will generally be upheld unless the Arbitration Clause is “null and void, inoperative or incapable of being performed”.

Inferred Agreement

In accordance with Hi-Fert Pty Ltd v United Shipping Adriatic Inc (1998) 89 FCR 166, where formal legislative requirements to establish the existence of an Arbitration Agreement have not been accorded with, an ad hoc Arbitration Agreement may be inferred by the common law if the parties have proceeded on the basis that such an arrangement exists.

Scope of the Disputes

Generally, Arbitration Clauses will cover all disputes arising out of the relevant commercial agreement and Courts and arbitral tribunals will not ordinarily favour arguments that certain disputes do not fall within the wording of the Arbitration Clause as a matter of construction.

Courts apply the usual contractual rules of interpretation to Arbitration Clauses, and so care is needed to ensure that the dispute resolution is drafted in a way to give effect to the parties’ intentions in this respect.

If the intention is to refer the widest possible range of disputes to commercial arbitration, then the Arbitration Clause needs to be written using wide words, and conversely, if the parties want a limited range of matters to be determined in commercial arbitration, then it would be prudent to adopt narrower words.

The case of John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 notes that terms in Arbitration Clauses such as “arising out of” or “in connection with”, relating to the determination of scope of applicable disputes that are to be referred to commercial arbitration, are to be “liberally construed so as to further their ultimate intent, namely, that their disputes should be susceptible to the forum which they have chosen”.

“Seat” of the Arbitration and Governing Law

Arbitration Clauses typically contemplate the “seat” of the commercial arbitration, being the jurisdiction which applicable to the commercial arbitration process, and therefore which courts will have oversight over the commercial arbitration and support the arbitral process.

The “seat” of a commercial arbitration is different from the physical place of the commercial arbitration (e.g. an arbitration with a seat in New South Wales can still physically take place anywhere).

Although not necessary desirable or advisable, it is common for the “seat” contemplated in an Arbitration Clause to be different from the governing law of that commercial agreement (that contains the Arbitration Clause), and so it is prudent to expressly state the law governing an Arbitration Agreement in the Arbitration Clause.

Powers of the Courts

The Uniform Law will also give powers to the Courts of the “seat” in relation to certain aspects of the arbitration. Broadly speaking, these include issues such as the ability of the parties to the commercial agreement to apply to the Courts for support (e.g. an order to freeze assets or obtain evidence), the ability to challenge decisions of the tribunal and the award, and provisions on enforcement.

Institutional / ‘Ad hoc’ Arbitrations

Upon an Arbitration Clause being invoked, if the parties to the commercial agreement are able to appoint an arbitrator, then the parties and the tribunal can decide the commercial arbitration procedure to be followed.

Conversely, if parties to the commercial agreement are unable to appoint an arbitrator, the Courts may be able make orders as to appointment of the arbitrator and the commercial arbitration procedure to be followed.

Although not obligatory/necessary, Arbitration Clauses will often refer to a specific arbitration institution to assist with, facilitate, administer, and supervise the conduct of any commercial arbitration process that is commenced under the Arbitration Agreement (Institutional Arbitration).

On the other hand, a commercial arbitration managed by the parties to the commercial agreement themselves which is conducted without Institutional Arbitration support is called an “ad hoc” arbitration, of which are much cheaper than Institutional Arbitrations. In such circumstances, the parties:

1. can draw up the arbitration rules themselves, leave the rules to the discretion of the arbitrators or, as is more common, adopt rules specially written for ad hoc arbitration;
2. manage the appointment of the arbitrators;
3. negotiate the arbitrator’s fees directly with the arbitrator;
4. pay the arbitrator’s fees directly to the arbitrator; and
5. arrange all logistics for the hearing.

In the context of an “ad hoc” arbitration (as opposed to Institutional Arbitration), there is no supervision of arbitral awards.

Rules

One of the distinct advantages of arbitration over court proceedings is that arbitration allows parties to choose their own rules and procedure.

Although not obligatory/necessary, it is useful to specify the applicable arbitration rules in an Arbitration Clause. Alternatively, the arbitration rules to be used can be chosen by the arbitrators themselves.

If the parties to a commercial agreement adopt Institutional Arbitration, then it is common for that institution’s arbitration rules to apply, however, this is not always the case and it is possible to provide for Institutional Arbitration but state that another set of rules is applicable.

Further, it is also possible for the parties to a commercial agreement to set their own arbitration rules including limiting disclosure, limiting expert evidence or limiting the recovery of costs.

Number of Arbitrators and Qualifications

Arbitration tribunals are typically constituted by one or three arbitrators.

The number of arbitrators can be specified in an Arbitration Clause, or alternatively omitted so that the matter is left to be determined under the relevant rules once a dispute has arisen.

A tribunal consisting of three arbitrators will have the advantage of being more likely to reach the ‘right’ decision and limiting unfair results or incorrect decisions, which is important in situations where rights to appeal or challenge an arbitral award are limited – it is usual to provide for the appointment of a tribunal of three arbitrators in high value disputes. On the other hand, an arbitration conducted by a sole arbitrator is likely to be quicker and cheaper.

Where it is necessary for the arbitrator to have specific expertise (e.g. expertise specific to a particular industry, specific qualifications and/or specific employment experience), then it would be desirable to state that clearly in the Arbitration Clause, however, this should be done with care and diligence to avoid unduly limiting the pool of available arbitrators who are able or willing to accept appointment.

Further, an Arbitration Clause should never specify a named individual as that person may be unable or unwilling to act when the dispute arises and then the arbitration clause would be unenforceable.

Language

It is desirable and advisable for an Arbitration Clause to specify the language of the arbitration and the oral submissions in any associated hearing, particularly if the commercial agreement (containing the Arbitration Clause) involves international parties, but if not specified the tribunal will decide the language.

Waiver of Right to Appeal

If desirable, an Arbitration Clause can specify that the parties to a commercial agreement agree to waive the right to appeal an arbitral award on a point of law in order to ensure that it is final and binding.