A Clause Worth Fighting For: Tips for Drafting an Effective Arbitration Agreement

A Clause Worth Fighting For: Tips for Drafting an Effective Arbitration Agreement
Angelika Hunnefeld and Ricardo A. Gonzalez

There is no such thing as a "standard" arbitration clause. Each deal is different and client objectives vary from one transaction to the next. Accordingly, counsel should carefully consider the potential disputes that may arise in a particular transaction and tailor the terms of an arbitration clause to each client's needs and business objectives. While it is not possible to draft a one-size-fits-all arbitration clause, it is possible to identify key terms to consider and incorporate in most arbitration agreements, including the following:
  • • Governing law: Defines the potential claims, defenses and relief available. In international transactions, counsel should consider whether the foreign law includes protectionist statutes or limitation of remedies.
  • • Seat of arbitration, or legal place: May impact enforcement of the award depending on available levels of review and average time required for completing the review process in the courts of the "seat."
  • • Scope of arbitral discretion: Defines the authority conferred on the arbitrators and should be clearly described to minimize the risk of litigation over arbitrability and/or potential challenges to an award.
  • • Arbitration rules: Provide the structure and procedure for the arbitration. It is generally advisable to incorporate the rules of a reputable institution — i.e., the American Arbitration Association's International Centre for Dispute Resolution, or ICDR, the International Chamber of Commerce, or ICC — rather than having no defined rules. The institution's rules become part of the arbitration agreement and help promote orderly proceedings.
  • • Discovery: Since discovery is generally limited in arbitration, it is important to consider the potential need for discovery in each case and incorporate specific language in the arbitration clause to secure the availability of discovery.
  • • Foreign languages: If a substantial amount of evidence or testimony is available in more than one language, it may be advisable to conduct the arbitration, and require the arbitrator to be fluent, in those languages.
  • • Attorney fees: The right to attorney fees should be clearly defined in the arbitration clause to eliminate potential disputes at the time of initial enforcement or in post-arbitration proceedings.
  • • Confidentiality: Specific confidentiality requirements should be clearly described in the arbitration clause as the arbitration rules adopted by the parties may not provide the necessary or desired protection in a given case.
While this is not an exhaustive list, it highlights several key terms that can have a material impact on the conduct of the arbitration and the outcome of the dispute.

Consider the hypothetical example of Company A, a U.S. corporation, alleging that Company B converted $10 million in a fraudulent investment deal. The converted funds are in Company B's bank account in Louisiana. The parties agreed to arbitration, but the clause only provides that the seat of arbitration will be London and that "any dispute between the parties will be arbitrated." Company A intends to file an arbitration claim but fears that Company B will dissipate the funds as soon as the claim is filed.

Had the parties opted for an institutional instead of an ad hoc arbitration, before one of the leading arbitral bodies, such as the ICC or ICDR, Company A could apply to the arbitral tribunal or an emergency arbitrator for interim relief to prevent Company B from dissipating the funds during the pendency of the arbitration. Instead, Company A will likely need to apply for a freezing order in a court in London, the seat of the arbitration. Additionally, because the arbitration clause does not specify a governing law, the law of the seat will likely govern the procedural aspects of the proceeding, and there may be protracted litigation over applicable substantive law.

Thus, although the funds are located in the United States, Company A will have to travel to England, appear before an English court and make the requisite showing under English law to obtain a worldwide freezing order, or WFO. Even if the English court grants the WFO, Company A will need to obtain another order from the English court permitting enforcement of the WFO in a foreign jurisdiction, and then file an action in federal district court in Louisiana to freeze the funds in Company B's account.

As illustrated, the circumstances of each transaction require the evaluation and selection of specific terms in an arbitration clause. These decisions may have far-reaching implications on the conduct of the arbitration and the outcome of the dispute. By giving careful consideration to key terms of an arbitration clause and adapting them to a particular transaction at the outset, counsel can minimize litigation risk and expense as well as the uncertainty that a court, arbitrator or body of law will "fill in the gaps" in a potentially disadvantageous way.

Angelika Hunnefeld and Ricardo A. Gonzalez are litigation shareholders in the Miami office of Greenberg Traurig. Hunnefeld is board-certified in international law by the Florida Bar and practices in the areas of commercial litigation, international business arbitration and compliance with the Foreign Corrupt Practices Act. Gonzalez practices in the areas of international arbitration and complex commercial litigation.

This article was originally published in the Daily Business Review.


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