Chapter § 8.03 The Arbitration Agreement

• Jurisdiction: United States
• Publication year: 2020

§ 8.03 The Arbitration Agreement

The most vital tool for maintaining an efficient arbitration is the arbitration agreement. This agreement forms the foundation of an arbitration, as it is the basis of the arbitral tribunal’s authority to issue an award binding on the parties. The U.S. Supreme Court has explained, “[a]rbitration is strictly a matter of consent and thus is a way to resolve those disputes—but only those disputes—that the parties have agreed to submit to arbitration.”²² Because the consent to arbitrate is so fundamental to the tribunal’s authority, an award may be vacated in the whole or in part under the New York Convention if it, or a portion of it, exceeds the tribunal’s authority.²³

An agreement to arbitrate must be in writing.²⁴ At its most basic, an effective arbitration agreement avoids disputes regarding its enforceability and the scope of the tribunal’s authority or jurisdiction. A poorly drafted provision opens the door not only to risk of vacatur, but also to costly and time-consuming preliminary disputes as to whether a claim is properly litigated or arbitrated. These disputes require either a separate court proceeding or an additional stage in the arbitration.

At its best, a well-drafted arbitration agreement not only minimizes such disputes, but also supplies the parties and tribunal with tools enabling them to cater the arbitration to the specific claims at issue. The process of drafting such an arbitration agreement is not particularly time-consuming or complex. Nonetheless, it requires careful consideration, and the agreement’s importance necessitates that it not be a mere afterthought during the negotiations of the broader transaction.

[1] Drafting an Arbitration Agreement

Importantly, arbitration agreements should be drafted by an attorney with experience specifically in drafting these clauses. To do so, counsel considers the disputes most likely to arise under a contract and each party’s interests in those foreseeable disputes are assessed. The arbitration agreement is then tailored to ensure that the parties and tribunal have the necessary authority to resolve the disputes as effectively as possible. This section provides an overview of the issues that experienced counsel considers in drafting these clauses, focusing on those considerations that impact the efficiency of the dispute resolution process. Note that considerations other than efficiency may impact the arbitration agreement.

To be enforceable, an arbitration agreement must (i) specify the types of disputes to be arbitrated, (ii) provide that arbitration is the exclusive means of resolving those disputes, and (iii) incorporate applicable arbitral rules governing the arbitration. Failure to include these three fundamental provisions renders the arbitration agreement unenforceable. Each administering institution provides model clauses containing these necessary provisions. These should serve as the basis for the arbitration agreement, while they may be augmented, they should not be changed without reason.

Beyond the three necessary provisions, it is strongly recommended that an arbitration agreement address nine additional issues: (i) the administering institution, if any; (ii) the arbitral seat; (iii) the number of arbitrators to hear the dispute; (iv) the method of selecting the arbitrators; (v) the substantive law applicable to the arbitration; (vi) the language of the arbitration; (vii) where the award can be enforced or vacated; (viii) authorization for interim relief; and (ix) the finality of the arbitration award.

For most arbitration agreements, addressing these 12 issues is sufficient—and including adding provisions unnecessarily risks overcomplicating the agreement, raising questions as to the intended effect of provisions. For some agreements, however, the characteristics of a transaction and the potential disputes that may arise render additional, optional provisions advisable.

[2] Elements of an Arbitration Agreement

The list below identifies the necessary, strongly recommended, and additional provisions that may be considered in drafting an arbitration agreement.

Drafting an Arbitration Agreement
Required Provisions
1	What is the scope of the arbitration agreement?
2	Is arbitration the exclusive means of resolving the dispute?
3	What arbitration rules apply to the arbitration?
Strongly Recommended Provisions
4	Should the arbitration be administered?
5	Where should the arbitration be seated?
6	Should one or three arbitrators hear the dispute?
7	How should arbitrators be selected?
8	What law governs the arbitration and the arbitration agreement?
9	What language should the arbitration be held in?
10	Should conservatory or interim relief be expressly authorized?
11	What courts may enforce or vacate an award?
12	Should the finality and binding nature of the award be made express?
Optional Provisions
13	Should the arbitration be confidential?
14	Should the dispute resolution process be multi-tier?
15	Should the arbitrators be required to have any specific qualifications, skills, expertise or background?
16	Should the statute of limitations for certain claims be limited, if permissible under applicable law?
17	Should summary disposition be expressly authorized?
18	Should joinder or consolidation be expressly authorized?
19	Is security during the pendency of the arbitration necessary?
20	Should disclosure be limited?
21	Should time limits be imposed on the arbitral process?
22	Should damages be limited, and, if so, how?
23	What interest, if any, should the tribunal award on monetary damages?
24	Should the currency of the award be specified?
25	Should offsets on payments made pursuant to an award be expressly permitted or prohibited?
26	Should the tribunal allocate costs and fees (including attorneys’ fees) and, if so, how?
27	How should the costs of enforcing any arbitration award be allocated?
28	Must the parties continue to perform any contractual obligations during the arbitration?

While other factors must be assessed, considerations of efficiency and cost-effectiveness are summarized for each issue in turn below.

[3] Required Provisions

[a] What Is the Scope of the Arbitration Agreement?

Except in rare circumstances, an arbitration agreement should require that all disputes arising under or relating to the parties’ contract must be resolved by arbitration. This language—“all disputes arising under or relating to”—is considered by U.S. courts to be a “broad” arbitration clause and, as such, it is deemed to cover even collateral claims that “implicate[] issues of contract construction or the parties rights and obligations under it.”²⁵ By covering even collateral claims, disputes over whether the agreement covers a particular claim are eliminated.

In rare circumstances, parties may wish to reserve specific types of disputes for determination by experts with specialized knowledge. Such disputes may include purchase price adjustment disputes in mergers and acquisitions, technical disputes in construction, and infringement of intellectual property disputes. If an expert determination provision is also included in a contract, both it and the arbitration agreement must be carefully drafted to minimize disagreements over which provision applies. Even then, disagreements over the proper forum to resolve the dispute are common, particularly when a dispute implicates both technical and legal questions.

[b] Is Arbitration the Exclusive Means of Resolving the Dispute?

Arbitration agreements must be mandatory to be enforceable. As a result, arbitration agreements must use mandatory language, such as “shall,” that requires the parties to arbitrate.

[c] What Arbitration Rules Apply to the Arbitration?

An arbitration agreement must identify the rules that will govern the arbitration. In administered institutions, the applicable rules are dictated by the selection of the institution (or vice versa): the administering institution’s rules apply.

Rules across the major administering institutions contain broad similarities, and selection of one institution’s rules over another’s is usually not dispositive. Nonetheless, the distinctions among rules do impact the procedure. There are, for example, important differences as to how, in the absence of party agreement, the tribunal is constituted, the seat selected, and other key aspects of the arbitration are determined; when third parties may be joined or arbitrations consolidated; and the process by which emergency relief is awarded. In addition, each institution also has its own unique procedure: the ICC rules, for example, require the parties and tribunal to draft the “Terms of Reference,” which identifies key information about the arbitration and describes the parties’ positions and the relief they seek.²⁶

[4] Strongly Recommended Provisions

[a] Should the Arbitration Be Administered?

An arbitration may be ad hoc—i.e., created by the parties specifically for that dispute—or administered—i.e., overseen by an...