Ingredients of An Effective Arbitration Clause for Domestic ...

Ingredients of An Effective Arbitration Clause for Domestic ...

National Workshop on Drafting of Commercial Agreements Essentials of International Dispute Resolution Clauses 3 September 2016 Tejas Karia Partner Shardul Amarchand Mangaldas & Co. Introduction Dispute Resolution Clauses are often relegated to the end of contractual negotiations. Referred to as midnight clause lack of deliberation and thought on the drafting of the clause. Dismissed as boilerplate and given standard wording. They should be customized depending on the needs of the parties and the specific agreements. Privileged & Confidential 2 Arbitration v/s Litigation Speed Cost Choice of arbitrator Flexibility of procedure Arbitrability

Award executed as a decree Limited grounds for challenge to an Award Privacy Privileged & Confidential Privileged & Confidential |3 Litigation Clauses If parties decide to resolve their disputes by going to court instead of arbitration, they must consider the following: Which national court would have jurisdiction factors influencing would be convenience, preferred judicial system and enforcement. Whether such jurisdiction is exclusive or nonexclusive, Exclusive jurisdiction gives certainty and greater protection.

Non-Exclusive jurisdiction offers flexibility. Privileged & Confidential 4 Drafting Of An Effective Arbitration Clause Arbitration clauses checklist Preliminary Consideration: Is Arbitration the best dispute resolution option? Multi step Clauses: Inclusion of negotiation and / or mediation prior to commencement of arbitration. Which disputes will be arbitrated? Who will arbitrate and how will the tribunal be selected? Seat/ Place of arbitration. (Venue of arbitration) Language of the arbitration. Using an arbitration institution. Choice of law/ governing law. Currency in which the award will be made Remedies Privileged & Confidential Privileged & Confidential |5 Drafting Of An Effective Arbitration

Clause Basic provisions Additional Provisions Scope / Disputes Covered Number of Arbitrators Governing Law Seat/Venue Jurisdiction Language Number of Parties Rules etc (Ad-hoc Institutional) Good faith discussions Qualification and nationality of Arbitrator Appointing authority

Other matters- confidentiality etc. or Privileged & Confidential Privileged & Confidential |6 Scope of the Clause Clause should be broadly worded arising out of or in connection with to include all disputes within the ambit of the arbitration agreement. Narrow arbitration clause would raise debate on whether a particular dispute is covered under the scope of the arbitration agreement. E.g. related agreements. It is also important to ensure that the disputes covered by the clause is arbitrable.

Disputes which are non arbitrable in India are matrimonial disputes, winding up matters, insolvency and testamentary matters etc. Privileged & Confidential Latest addition is disputes relating to trust, trustees and 7 Arbitration Agreement Section 2(1) (b) r/w Section 7 of the 1996 Act: Arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. Requisites for a valid arbitration agreement Agreements must be in writing and signed by parties. Is considered to be in writing Document signed by parties Exchange of letters, telex or other means of telecommunication Exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. Agreement may also bePrivileged

incorporated by reference (reference to Privileged & Confidential & Confidential |8 an agreement, which contains an arbitration clause) Arbitration Agreement It must be in respect of existing or future disputes. It can be inferred from documents / related agreements / correspondence / acts of parties. An arbitration clause which forms part of a contract shall be treated as an independent agreement and is severable from the main contract. Privileged & Confidential Privileged & Confidential |9 Arbitration Agreement Severability An arbitration clause survives the main contract. Section 16 (1) (b)- merely because the contract is ruled to be

null and void, does not entail ipso jure, the invalidity of the arbitration clause. The same may survive Termination Repudiation Frustration Rescission The arbitration clause does not survive: Substitution by a new contract Discharge of the contract Privileged & Confidential Privileged & Confidential | 10 Arbitrability Section 2(3)-Part I shall not affect any other law by virtue of which certain disputes may not be submitted to arbitration. Certain disputes cannot be resolved through arbitration. disputes relating to rights and liabilities which give rise to or arise out of criminal offences matrimonial disputes (divorce, judicial separation, restitution of conjugal rights, child custody) guardianship matters; insolvency and winding-up matters; testamentary matters (grants of probate, letters of administration and succession certificate) eviction or tenancy matters governed by special statutes

where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes (Booze Allen and Hamilton v. SBI Home Finance Limited (2011) 5 SCC 532 ) Privileged & Confidential Privileged & Confidential | 11 contd.. Arbitrability Narrow Interpretation of Non-Arbitrability Example: Where facts relating to a criminal matter give rise to right to claim damages or where husband and wife enter into agreement over terms of their separation, such disputes will be arbitrable. Power to Grant Specific Relief There is no prohibition in the Specific Relief Act, 1963 that issues relating to specific performance of contract relating to immovable property cannot be referred to arbitration. Neither 1996 Act prohibits such reference as contrasted with Section 15 of the English Arbitration Act, 1950 or Section 48(5)(b) of the English Arbitration Act, 1996 which contains a prohibition relating to specific performance of contracts concerning immovable property. (Olympus Superstructures v. Meena Vijay 1999 (5) SCC 651) Test of Arbitrability for Specific Relief In the context of a mortgage suit for sale of mortgaged property Privileged

& Confidential & Confidential 12 held that it was action Privileged in rem and | not an action in personam . Choice of Law Various laws involved in an international commercial arbitration. Parties can choose different laws: Substantive Law governing the contract Law governing arbitration agreement obligation to submit the dispute to arbitration, validity of the arbitration agreement Law governing procedure determines questions of procedure, i.e. evidence, powers and duties of arbitral tribunal (usually the law of the seat).

Essential to specify, at least, the substantive law, law governing arbitration agreement and the law governing procedure, in order to avoid ambiguity. Privileged & Confidential 13 Importance of the Seat It is important to specify seat of the arbitration as it decides The law governing the procedure of the arbitration. The law governing arbitration agreement, if parties have not explicitly chosen it. Courts of the seat have supervisory jurisdiction over the arbitral process.

Whether the award will be enforceable in India- reciprocity requirements under Section 44 of the Act, e.g. South Africa/Indonesia are not notified therefore any awards from arbitrations seated there will not enforceable in India. Seat v. Venue clause can provide for a convenient venue for arbitration even if seat is another country. Privileged & Confidential 14 Deciding Seat of Arbitration Arbitration Laws of the country, which is the seat of arbitration Mandatory rules would apply select a seat where laws allow maximum party autonomy and limited judicial intervention. Courts can be approached in case of discovery, interim relief etc.

If courts of the seat set aside award, may not be enforceable in any other jurisdiction Logistics Geographically convenient for parties, witnesses, experts. Adequate facility to conduct arbitration. Diverse pool of arbitrators. Language of arbitration. Privileged & Confidential 15 Number of Arbitrators Arbitration clause should include whether there will be a sole

arbitrator or a panel of Arbitrators Factors to consider while deciding number of arbitrators quantum of claims, nature of claims and relationship between parties. Procedure Parties can decide themselves in the contract Parties can select an institution to appoint an arbitrator if agreed procedure fails, party can always approach the Privileged & Confidential court to appoint arbitrator. 16 Escalation Clauses Arbitration clauses can also include mediation/negotiation as a precondition to arbitration. Also known as escalation clauses or stepclauses. Initial steps are mostly to reach an amicable settlement and to avoid arbitration. Appropriate in case of parties with long standing and ongoing commercial relationship. Well structured multi-tier arbitration clauses can help parties reach an early settlement and maybe cheaper and faster. Parties can take advantage and unnecessarily delay the process. Important to have time limits at each step.

Mediation Parties discuss in presence of a neutral person (mediator) who controls the process and directs discussion. Mediator does not resolve the dispute, he only facilitates. He generates resolution options and assists parties in drafting a settlement. Privileged & Confidential 17 Structured and Ad-hoc Arbitration . Advantages of Institutional Arbitration If the Arbitration is being conducted under the auspices of an arbitral Institution, it is common for that institution to be involved in the administration of the reference. The main advantages of institutional/structured arbitrations are:-

Advantages of ad-hoc Arbitrations Not all arbitration rules involve administration of the reference by an Institute. UNCITRAL arbitration rules for example are specifically designed for use in ad-hoc arbitrations. In an ad-hoc arbitration, parties and arbitrators either develop their own rules in the Arbitration Agreement or at ..contd a. It provides a procedural framework the time of the arbitration, or they use for the case. For example, it will standard rules that have been arrange service on the other party promulgated to assist parties in ad-hoc and may act as a conduit for arbitration. The advantages are communications between the Tribunal a. As the rules are the guidelines and the parties. which

form the procedural framework for the arbitral b. If concerned with the particular field proceedings, it follows that such of commerce, it may be able to arbitrations are cost effective and provide specialist services or do not involve the rule of an arbitrators with particular expertise. intermediary institute to facilitate Privileged & Confidential Privileged & Confidential | 18 proceedings. (contd..) Structured and Ad-hoc Arbitration .

Advantages of Institutional/Structured Arbitration c. Certain arbitral institutes have introduced procedures which are designed to improve the speed, cost and efficiency of the arbitration process. Advantages of ad-hoc Arbitrations However, the absence of an administering institution means that the arbitrators will have to perform administrative functions such as maintaining files, dockets and correspondence. This may distract arbitrators, create ..contd additional delay and increase costs.

d. The Institutional arbitration may serve to relieve the parties of some of the administrative burden of conducting reference. The b. The best known ad hoc arbitration supervision provided by institutions, rules are the UNCITRAL for the arbitration proceedings Arbitration Rules. Parties should includes: clearly designate the applicable set of rules in their agreements to ensuring that all parties and the arbitrate. arbitral tribunal receive written statements approving the terms of reference Privileged & Confidential & Confidential | 19

assisting the parties Privileged and the Structured and Ad-hoc Arbitration . Advantages of Institutional/Structured Arbitration Advantages of ad-hoc Arbitrations encouraging the arbitral tribunal to c. Parties opting for ad hoc arbitrators make the award without delay; can greatly reduce the possibility of and deadlock in appointing the arbitral tribunal by designating checking the award and approving an appointing authority in their it. arbitration clause. The appointing authority will be charged with

e. Use of institutions to appoint the ..contd selecting arbitrators should the arbitral tribunal, where they take parties be unable to come to an on the rule of Appointing Authority, agreement. may be considerably more effective, cheaper and quicker than applying to the Court. f. Scrutinize awards for compliance with the organisations applicable rules. Privileged & Confidential Privileged & Confidential | 20 Conclusion Parties have various options of dispute resolution litigation, arbitration and other hybrid clauses. Parties should carefully choose the governing law of the contract and arbitration. They should make an informed decision depending on

the nature of the contract, stakes involved and the relationship between the parties. Privileged & Confidential 21 THANK YOU Shardul Amarchand Mangaldas & Co Advocates & Solicitors Amarchand Towers 216 Okhla Industrial Estate Phase III New Delhi 110 020 T +91 11 4159 0700 4060 6060 F +91 11 26924900 E [email protected] Ahmedabad Bengaluru Gurgaon Kolkata Mumbai New Delhi

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