Introduction

Arbitration has become a preferred method for resolving disputes across various industries, offering a private and efficient alternative to litigation. One of the key attractions of arbitration is its flexibility, allowing parties to tailor the process to meet their specific needs.

However, this flexibility can be a double-edged sword if the arbitration agreement is not carefully drafted. A defective arbitration clause can lead to significant delays, increased costs, and complications that undermine the very benefits that arbitration is intended to provide.

The effectiveness of arbitration largely hinges on the precision and clarity of the arbitration clauses. A well-crafted arbitration agreement can help parties navigate potential disputes smoothly, avoiding unnecessary legal battles and ensuring that the arbitration process unfolds as intended. Conversely, a poorly drafted clause can result in unintended consequences, such as disputes over the validity, scope, or interpretation of the arbitration agreement itself.

Below are some practical tips to guide you in drafting an arbitration clause:

1. 1) Define the Scope of Arbitration Clearly
2. A fundamental aspect of any arbitration agreement is the clarity with which it defines the scope of disputes subject to arbitration. It is essential to specify the types of disputes that the arbitration clause will cover, whether they relate to contractual disagreements or any other matters pertinent to the parties.
3. To ensure comprehensive coverage, it is advisable to draft the clause in broad terms, capturing the full range of potential disputes. A commonly used wording, such as “all and any disputes and/or differences arising out of or in connection with this contract shall be referred to arbitration,” can be effective in encompassing a wide array of issues, thereby minimizing the risk of ambiguity or exclusion.

2. 2) Choosing the Appropriate Arbitration Rules
3. When drafting an arbitration agreement, one of the most crucial decisions is whether to adopt the rules of an established arbitral institution (such as the AIAC, which is commonly adopted in Malaysia) to govern the arbitration process.
4. The advantage of this choice is that, for a fee, the institution plays a central role in administering the dispute, offering a well-established and predictable procedure through its rules.

3. 3) Seat of Arbitration
4. Choosing the seat of arbitration is an important decision, as it determines the procedural law that governs the arbitration and can impact the enforceability of the award. The seat may also influence the availability of interim measures and other procedural aspects.

4. 4) Consider Applicable Law
5. The arbitration clause should specify the governing law that applies to the arbitration agreement. This choice sets the legal framework within which the arbitrators will make their decisions.

5. 5) Language
6. Additionally, it is essential to specify the language(s) of the arbitration as this will be the language used in pleadings, submissions, and hearings.  Choosing the language that the parties frequently use in their communications can save translation and interpretation expenses.

4. 6) Number and Method of Arbitrator Appointment
5. The number of arbitrators and the method of their appointment should be clearly defined in the arbitration clause. Depending on the complexity and value of the dispute, parties may opt for a single arbitrator or a panel of three arbitrators. The appointment process should also be outlined, whether it involves mutual agreement between the parties and/or appointment by an appointing authority.

6. 7) Multi-Tier Dispute Resolution Clause
7. The parties to an arbitration may decide if they want to try a non-binding process such as mediation before taking their disputes to arbitration i.e. by incorporating a multi-tier dispute resolution clause. A multi-tier dispute resolution clause typically outlines a structured process for resolving disputes. This type of clause typically specifies a series of steps that must be followed sequentially to address a dispute. It often includes various phases such as negotiation, mediation, or expert determination, each of which must be attempted before proceeding to the next phase. If these steps do not resolve the dispute, the parties may then turn to courts or arbitration as a final recourse.
8. It is important to establish a specific timeframe for mediation or negotiations, ensuring that the parties are aware of when this stage concludes, allowing them to move forward with arbitration. Without a defined time limit, disputes may arise over when, or whether, arbitration can be initiated. It is pertinent to note that, such provision may be a nuisance if a claimant wishes to start the arbitration proceeding promptly.

7. 8) Address Finality of the Award
8. Including a provision in the arbitration clause that stipulates the award shall be “final and binding” is highly advisable. While this provision does not completely eliminate the possibility of the award being challenged or set aside, it clearly indicates the parties’ intent for the award to be enforced through the courts. Clarifying the finality of the award in the arbitration clause can help prevent unnecessary delays in enforcing the decision.

Conclusion

Drafting an effective arbitration clause requires careful attention to several key elements and potential circumstances. By precisely outlining the scope and applicability, selecting the right arbitration rules, specifying the seat and language, addressing procedural issues, and considering the relevant law and jurisdiction, the parties can ensure their arbitration clauses establish a clear and reliable process for dispute resolution.

This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.

About the Author

Lynn Foo
Partner
Construction & Energy
Harold & Lam Partnership
lynn.foo@hlplawyers.com

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