Following a restful December holiday, our retired arbitrator shares his priceless insights on the consequences of defective arbitration clauses, as well as the minimum requirements for a properly drafted one.
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The consequences of a non-alcoholic December holiday and a poorly drafted arbitration clause
Best Uncle Oswald
It is me again, Frikkie. Having run out of money and Klipdrift shortly after New Year’s Eve, I am sitting at the Drie Pikkewyne, sipping a disgusting alcohol-free beer, watching the waves break on a deserted Jongensfontein beach. A deeply depressing scenario, really. But not nearly as depressing as my latest arbitration experience. As contractor, I am the claimant in a construction dispute. The arbitration clause in my contract with the employer simply reads as follows: “Disputes between the parties will be referred to arbitration.” A payment dispute arose in January last year. The employer has no bona fide defence to my R15 million claim and seeks to delay the inevitable by any means possible. We have wasted the last year on an endless number of disagreements concerning the arbitration clause. The disagreements include how and by whom an arbitrator has to be appointed, which rules will govern the proceedings, where the juridical seat of the arbitration will be and whether our dispute falls under the arbitration clause. A year down the line, me being out of pocket, we do not even have an arbitrator yet. Surely this cannot be what arbitration ought to be? I realise that I should have paid attention to the arbitration clause when I signed the contract, but I would in any event appreciate your thoughts on how to prevent a repetition in future.
Be that as it may, you have touched a raw nerve. I have, over the years, shuddered at the nonsense contained in certain arbitration clauses. The consequences are often disastrous.
Since statutorily ordained arbitration processes can only materialise in consequence of a written agreement, the careful drafting of such agreement (the arbitration clause) is arguably the most important aspect of any arbitral process. In practice, however, this aspect is often neglected. Parties and their representatives regularly copy and paste arbitration clauses from other contracts without considering the contents. In most instances, like in your matter, the consequences include more disputes, delay, expense and frustration.
As you have pointed out, in your matter the horse has bolted. Therefore, in future, I would advise you to carefully consider the arbitration clause in any contract or commercial document and, if it does not conform to the minimum requirements discussed below, to insist on its amendment before you commit yourself to the contract.
The purpose of an arbitration clause is to provide clear contractual terms for the immediate and effective commencement of arbitral proceedings in the event of a dispute. The last thing you want is a series of disputes concerning the terms, or lack thereof, contained in the arbitration clause. As you have unfortunately experienced, you may never get to the determination of the arbitral dispute, which is why you and the employer agreed on arbitration in the first place.
Therefore, in my view, the ideal arbitration clause ought to contain the following and nothing more:
- A declaration that it is of indefinite duration, that it exists independently from the rest of the contract, and that it takes the place of any previous alternative dispute resolution agreement between the parties. This way you will ensure, first, that your arbitration clause will survive any misfortune that may befall the remainder of the contract; and, second, that it is undoubtably the only dispute resolution agreement between the parties.
- A declaration in the widest possible terms to the effect that all disputes of any nature shall (not may) be referred to arbitration. Properly worded, this will prevent any dispute relating to the ambit of the arbitration clause.
- A specification of at least the class of person or persons to be appointed as the arbitral tribunal. To avoid disputes and allegations of bias, I would prefer to leave the appointment of a particular arbitrator or arbitrators to the appointing body. Having served on the Association’s Nominations and Appointments Committee, I know that they keep a regularly updated register of duly qualified arbitrators divided into, for example, professions, seniority, fields of specialisation and regions, and that they carefully consider all relevant factors when appointments are made.
- A specification of the appointing body in clear and correct terms, with reference to its registered name. An appointment by the wrong body may lead to an invalid appointment and to expensive delay when a party has to resort to litigation to have the appointment, and/or the arbitral process, set aside by a court.
- A specification of the rules that will govern the arbitral process. Most arbitration rules are from time to time superseded by later and better editions. As disputes often arise months and even years after the parties have agreed to an arbitration clause, it is advisable not to specify a particular edition of the rules, but rather to specify the edition which is current at the time of the appointment of the tribunal.
That, my dear Frikkie, is it. There is no need for an arbitration clause to go any further. The reason is self-evident. Most arbitration rules, including those of the Association, cover the complete arbitral process from the initial arbitral referral, the appointment of the tribunal, the conduct of the proceedings, right through to the award and all things relating to or arising from any of the aforesaid. Therefore, as long as the arbitration clause clearly specifies the applicable rules, there is no need to go beyond the five elements discussed above. I would strongly advise against any attempt to introduce any procedural elements to an arbitration clause. That is what the rules are for.
This hyperlink will take you to a proposed arbitration clause in Word format. I am satisfied that it contains all the required elements. It has survived the scrutiny of a number of experienced Fellows of the Association who know what they are doing. It may and ought to be inserted in any contract, quote, delivery note, receipt or similar commercial document. My advice to you is to use it as it is. Resist the temptation to amend it.
As always, I would appreciate your comments and the comments of our esteemed readers.