How to draft perfect arbitration clause

Summary

This video explores arbitration clauses, explaining their importance and how to draft them effectively. It covers the benefits of arbitration, such as being less formal, faster, and cheaper than court proceedings. The video highlights essential elements of an arbitration clause, including the scope of the agreement, governing law and jurisdiction, choice between ad hoc and institutional arbitration, language of proceedings, number and qualifications of arbitrators, fees, and time limits for appointment. Practical examples and specific phrasing for each element are provided to guide viewers in creating comprehensive and effective arbitration clauses.

Takeaways

• 🔍 Understanding arbitration clauses is crucial for ensuring disputes are handled appropriately and not outside the scope of arbitration.
• 💼 Arbitration is typically less formal, faster, and less expensive than court proceedings, making it a preferred choice for resolving disputes.
• 📜 Section 7 of the Arbitration and Conciliation Act states that disputes can be referred to arbitration through a clause or a separate agreement, and it must be in writing.
• 📚 The scope of the arbitration agreement should be as broad as possible to avoid disputes being outside the scope of arbitration.
• ⚖️ The governing law and jurisdiction are essential; the seat of arbitration determines the applicable jurisdiction and laws.
• 🌍 The venue of arbitration decides the physical location where arbitration will take place, which can be chosen based on convenience.
• 🏢 Ad hoc arbitration allows parties to determine their own rules and procedures, while institutional arbitration follows the rules of a specific institution.
• 🗣️ The language of arbitration should be specified to ensure clear communication between parties from different regions.
• 👥 The number and qualifications of arbitrators should be clearly defined, including whether a sole arbitrator or a panel will be used.
• 💰 The fees for arbitrators can be specified, particularly in ad hoc arbitrations, to manage costs effectively.
• ⏳ A time limit for the appointment of arbitrators, as specified in Section 21 of the Arbitration and Conciliation Act, ensures timely resolution of disputes.
• 📝 An effective arbitration clause includes scope, governing law, jurisdiction, venue, language, number of arbitrators, their qualifications, fees, and time limits.

Q & A

What is an arbitration clause?

An arbitration clause is a part of a contract that stipulates that any disputes arising from the contract will be resolved through arbitration instead of court litigation.

Why is it important to have an effectively drafted arbitration clause?

An effectively drafted arbitration clause ensures that disputes are resolved through arbitration as intended, preventing the possibility of being subject to a jurisdictional court that may be unfamiliar or inconvenient.

What are the advantages of opting for arbitration over going to court?

Arbitration is usually less formal, faster, and less expensive than court proceedings. It is particularly beneficial for complex disputes that would require extensive court time.

What does Section 7 of the Arbitration and Conciliation Act state?

Section 7 of the Arbitration and Conciliation Act states that parties may refer all or certain disputes to arbitration, and this can be done through a clause in a contract or a separate agreement, provided it is in writing.

What should be included in the scope of an arbitration clause?

The scope should define the widest possible range of disputes to ensure that the arbitration covers all potential issues, including validity, termination, or breach of the contract.

Why is specifying the seat of arbitration important?

The seat of arbitration determines the legal jurisdiction and the court's authority over the arbitration process, which impacts the laws and procedural rules that will apply.

What is the difference between ad hoc arbitration and institutional arbitration?

In ad hoc arbitration, the parties set their own rules for the arbitration process. In institutional arbitration, an established institution, such as the Mumbai Center for International Arbitration, governs the arbitration according to its rules.

How should the language of arbitration be specified in a clause?

The language of arbitration should be explicitly stated to avoid any confusion or disadvantage to any party, e.g., 'The arbitral proceedings shall be conducted in English.'

How can parties decide on the number of arbitrators?

Parties can specify either a sole arbitrator or a panel of an odd number of arbitrators in the clause, ensuring clarity on how the arbitration will be conducted.

What other important aspects should be included in an arbitration clause?

The clause should include the qualifications of the arbitrator, the arbitrator's fees, and a time limit for the appointment of the arbitrator, ensuring all procedural aspects are clear and agreed upon.

Outlines

00:00

📜 Understanding Arbitration Clauses

This paragraph introduces the topic of arbitration clauses, emphasizing their importance. It explains the risks of poorly drafted clauses and highlights the benefits of arbitration over traditional court proceedings, such as reduced formality, faster resolution, and lower costs. The paragraph also briefly mentions the relevance of the Arbitration and Conciliation Act, specifically Section 7, which requires arbitration clauses to be in writing and can encompass all or specific disputes.

05:02

🖋️ Drafting Effective Arbitration Clauses

This paragraph provides detailed guidelines on drafting effective arbitration clauses. It emphasizes the importance of defining the scope of the agreement to avoid disputes falling outside the arbitration's purview. It includes an example clause and discusses the importance of specifying the governing law and jurisdiction, as well as the seat and venue of arbitration, to avoid ending up in an unfamiliar court. The paragraph also introduces the concept of adhoc versus institutional arbitration, with examples and suggestions on how to write these clauses.

Keywords

💡Arbitration Clause

An arbitration clause is a part of a contract that requires the parties to resolve their disputes through arbitration rather than through court litigation. This concept is central to the video, which aims to explain how to draft an effective arbitration clause to ensure disputes are resolved smoothly. The script discusses the importance of including specific details such as the scope of the agreement, governing law, and the number of arbitrators to avoid potential issues.

💡Scope of Agreement

The scope of the agreement defines the range of issues that can be addressed through arbitration. In the video, it's emphasized that defining a broad scope is crucial to ensure all potential disputes are covered. An example provided is the language 'any disputes or differences arising from or in connection with this contract,' which ensures that even issues regarding the validity, termination, or breach of the contract fall under arbitration.

💡Governing Law and Jurisdiction

Governing law and jurisdiction refer to the legal framework and location that will oversee the arbitration process. The video explains that specifying the seat of arbitration is essential, as it determines the jurisdiction's laws that will apply. The script advises mentioning both the seat and venue explicitly to avoid ending up in an unfamiliar legal system. For instance, 'The seat and venue of arbitration shall be Bombay' clearly sets the legal and physical location.

💡Adhoc Arbitration

Adhoc arbitration is a type of arbitration where the parties themselves set the rules for the arbitration process without involving an institutional body. The video contrasts this with institutional arbitration and notes that in adhoc arbitration, parties decide on the procedures, such as submission of claims and evidence. This type of arbitration allows for more flexibility but requires a well-drafted clause to ensure all procedural aspects are covered.

💡Institutional Arbitration

Institutional arbitration involves following the rules of a specific arbitration institution, such as the Mumbai Center for International Arbitration. The video explains that choosing institutional arbitration means that the institution will regulate the entire process, including the appointment of arbitrators and procedural rules. This can provide a structured and reliable framework for resolving disputes.

💡Language of Arbitration

The language of arbitration is the language in which the arbitration proceedings will be conducted. The video highlights the importance of specifying this to avoid misunderstandings, especially when parties are from different regions. For example, stating 'The arbitral proceedings shall be conducted in English' ensures that both parties are clear about the language to be used, avoiding potential disadvantages.

💡Number of Arbitrators

The number of arbitrators refers to whether the arbitration will be conducted by a sole arbitrator or a panel of arbitrators. The video suggests specifying this in the arbitration clause to avoid ambiguities. For instance, 'The arbitration shall be conducted by a sole arbitrator' clearly indicates that only one arbitrator will oversee the dispute resolution, which can simplify and expedite the process.

💡Qualifications of Arbitrator

The qualifications of the arbitrator specify the necessary expertise or background that an arbitrator should have. The video advises including this detail to ensure that the arbitrator is capable of understanding and resolving the specific type of dispute. For example, requiring that 'the arbitrator shall be an engineer or architect' for technical disputes ensures that the arbitrator has the relevant knowledge.

💡Fees of Arbitrator

The fees of the arbitrator refer to the payment that the arbitrator will receive for conducting the arbitration. The video notes that specifying a fee structure, especially in adhoc arbitrations, can prevent disputes over costs. For instance, setting a fee cap in the arbitration clause ensures that both parties are aware of the financial obligations involved.

💡Time Limit for Appointment of Arbitrator

The time limit for the appointment of an arbitrator is the period within which the parties must appoint an arbitrator after receiving a notice of arbitration. The video mentions that Section 21 of the Arbitration and Conciliation Act stipulates a 30-day response time, but parties can agree to different terms. Including this in the arbitration clause ensures that the arbitration process proceeds in a timely manner.

Highlights

Arbitration clauses are crucial in determining whether a dispute will be resolved through arbitration or end up in a jurisdictional court.

Arbitration is generally less formal, faster, and less expensive than going to court, especially for complex disputes.

Section 7 of the Arbitration and Conciliation Act allows parties to refer disputes to arbitration either through a clause or a separate agreement, provided it is in writing.

Defining the scope of the arbitration agreement as broadly as possible helps avoid disputes being set aside due to being outside the scope.

A sample scope clause: 'Any disputes or differences arising from or in connection with this contract, including the adjudication of its validity, termination, or breach, shall be referred to and resolved by arbitration.'

The seat of arbitration determines the jurisdiction and laws applicable, making it critical to specify to avoid unexpected legal complications.

A sample governing law and jurisdiction clause: 'The seat and the venue of arbitration shall be [specified location], and the proceedings shall be governed by the laws of [specified jurisdiction].'

Choosing between adhoc and institutional arbitration involves deciding whether parties set their own rules or follow the rules of an arbitration institution.

Institutional arbitration, like that provided by the Bombay Center for International Arbitration, offers structured procedures and predetermined fees.

Specifying the language of arbitration is crucial to prevent disadvantages to parties unfamiliar with the local language where arbitration occurs.

A sample language clause: 'The arbitral proceedings shall be conducted in English.'

The number of arbitrators can be specified, with options including a sole arbitrator or a panel of arbitrators.

Qualifications of the arbitrator can be stipulated to ensure they have relevant expertise in the dispute's subject matter.

Fees for arbitrators can be capped in adhoc arbitrations to control costs.

Time limits for the appointment of arbitrators can be set, aligning with Section 21 of the Arbitration and Conciliation Act, which allows for customization in the arbitration clause.

A comprehensive example clause includes elements like dispute scope, seat and venue, governing law, arbitration language, number of arbitrators, and other relevant terms.

Transcripts

today we are diving into the world of

arbitration clauses if you've ever

wondered what an arbitration Clause is

and why it is important you're just in

the right place whether you're a

business owner a lawyer a law student or

someone who's just curious about the

legal side of things we've got you cover

in this video today I will be explaining

how you can draft an effective

arbitration CLA now you must be

wondering why it is important for us to

discuss this well drafting and effective

arbitration Clause is the most essential

part of any arbitration as sometimes due

to badly drafted arbitration clauses

your dispute may end up being outside

the scope of arbitration itself and you

may be thrown out into a jurisdictional

court which you have no idea of but

question is why should you opt for

arbitration in the first place well let

me tell you the pros arbitration is

usually less formal in nature

arbitration is also faster than going to

court and it is not expensive the cost

of arbitration can actually be lower

than going to court especially if the

dispute is complex and it would require

extensive code time coming to the act

now what does the arbitration and

conciliation act say about drafting a

clause let me tell you so section seven

of the arbitration and conciliation act

says that the parties May refer all or

even certain disputes to arbitration and

arbitration can also be in the form of a

clause or in form of a separate

agreement altoe and the most important

thing is that it should be in writing

now for you to be able to draft an

effective Clause you should know the

essentials which should definitely be

present in your Clause to make it

effective let us understand them one by

one so the first thing that you need to

focus on is the scope of the agreement

ideally widest possible scope should be

defined one of the main reasons as to

why awards are set aside is because the

matter itself is outside of the scope of

arbitration now you may say that why

don't you show us how you should draft

it so let's do one by one and I will

show you in Parts how you can do it

let's check out how the Clause of scope

should look like while defining scope

you should use this language any

disputes or difference arising from or

in connection with this contract

including the adjudication of its

validity termination or breach of

contract shall be referred to and

resolved by arbitration that's number

one the second thing to focus on is the

governing law and jurisdiction keep in

mind that the seat is the center of

gravity of arbitration seat basically

decides the jurisdiction of the Court

you basically allow laws of that

jurisdiction to follow you whether you

choose France Germany or even India the

law will follow you there what is the

consequence of not mentioning the seat

of arbitration you may end up in a court

or a jurisdiction that you know nothing

about and you would usually find parties

negotiating about the seat of

arbitration mostly another term that has

been coined by the gos is the venue of

arbitration the venue simply decides

where the parties would sit and

arbitrate it could be Kolkata Amad or

anywhere in the country how do you write

that Clause let me show you the

governing law and jurisdiction Clause

looks like this the seat and the venue

of arbitration shall be so and so you

can decide whether it has to be Bombay B

bore Delhi or whatever you like and the

proceedings shall be governed by the

laws of India now once you have

mentioned the scope seat and venue and

the governing law the next thing that

you need to consider is whether you want

an adhoc arbitration or an Institutional

arbitration let's discuss them adoc

arbitration is where the parties

determine the rules of arbitration

themsel in this procedure the parties

can decide the procedure on submission

of statement of claims the manner in

which they will submit evid evidence and

other aspects of the matter these are of

course subject to the arbitration and

conciliation act and the laws of India

let's discuss institutional arbitration

now this is where the parties may choose

to follow the rules of a specific

institution and the entire arbitration

in that case is regulated by the

institution itself Bombay Center for

international arbitration is one example

now the arbitrator the fees in fact the

procedure is all decided by the

tribunals how can you write this in your

sample Clause let me show you you can

simply write the party shall follow the

institutional rules of let's say the

Mumbai Center for international

arbitration and you can put that up here

as simple as that another thing to

specify is the language of arbitration

now assume if one party is in Kolkata

and other is in Bombay the proceedings

if initiated in mombay could be carried

out in marati and would land the other

party in trouble therefore you need to

be very specific about which language

you need to choose how can you write

this in your sample Clause let me show

you it's a very simple line it says the

arbitral proceedings shall be conducted

in English you can choose whichever

language is convenient to your cents

another thing to focus on while drafting

this Clause is the number of arbitrators

you could either mention that the

parties will refer it to a sole

arbitrator or refer it to the panel of

odd number of arbitrators how do you

write this this is how you can write it

the arbitration shall be conducted by a

sole arbitrator in this case we've

chosen a sole arbitrator

who shall be mutually decided by the

party now other important aspects that

should be present in a clause are the

qualifications of the arbitrator in the

situation if there is a dispute let's

say about a quality or a quantity or a

technical dispute you can have someone

specialize in the industry and specify

that the arbitrator shall at least be an

engineer or an architect or a lawyer or

somebody who has knowledge in that

particular field any other person would

not be able to do justice to your your

case you can also include the fees of

the arbitrator institutional courts or

appointed arbitrators may have specified

fees however in adhoc arbitrations you

can set a fee cap that needs to be paid

to the arbitrator and lastly you can

also tell about the time limit for

appointment of arbitrator section 21 of

the arbitration and conciliation act

says that after the notice of

arbitration the party needs to respond

within 30 days you free to change this

if you wish to once you mention it in

the clause

once you include all of the factors that

we have just discussed there you have it

one effective arbitration Clause let me

show you how the complete Clause looks

like by way of an example consider this

situation Pig suppliers private limited

is having its registered office at

Mumbai and it's going to supply 100 tons

of cement to ABC Construction private

limited which has its registered office

at Delhi every month they have entered

into a material supply agreement for

this purpose and this is for supply of

cement

they choose arbitration as the alterate

dispute resolution mechanism now if you

are required to formulate a clause for

these parties how would it look like

this is how any disputes or differences

arising from or in connection with this

contract shall be refer to and resolved

by the so arbitrator the seat and venue

of the arbitration shall be you can say

bomb and the courts of Bombay will have

exclusive jurisdiction the arbitral

proceedings shall be conducted in

English and the award shall be final and

fining on both the parties there you

have it an effective arbitration Clause

including all the essential elements

that we just discussed I hope you like

it let me know in the comments if this

helps you and share it share it with a

lawyer share it with a friend who wants

to draft or is struggling to draft an

arbitration Clause let me know in the

comments how it went for you and if you

want more such videos see you in the

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