Brevity in Arbitration Clauses

Every time I review the arbitration clauses in our template agreements, I wonder about the most succint, least ambiguous ,way in which I can draft the arbitration clause.

The standard arbitration provided by the AAA is

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

Ken Adams revision (from his blog at http://www.adamsdrafting.com/my-version-of-the-aaa-standard-arbitration-clause/)

As the exclusive means of resolving through adversarial dispute resolution any disputes arising out of this agreement or [describe the subject matter of the contract], a party may demand that any such dispute be resolved by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and each party hereby consents to any such disputes being so resolved. Judgment on the award rendered in any such arbitration may be entered in any court having jurisdiction.

My revision

Any legal dispute arising from this contract shall be settled by binding arbitration, in the English language, under the Commercial Arbitration Rules of the American Arbitration Association.  The seat of the arbitration shall be the city of Chicago, Illinois.


Why so succint?

We need concise, clear language. We are codifying an agreement between people that need to be understood very easily in the event of a dispute.  When drafting, there are two (among other) competing concepts.

The agreement must

a) faithfully record the nature of the agreement
and
b) must be clear enough so that when the parties return to the record, the parties and the adjudicatory body (court, judge, tribunal) can easily understand the agreement.

In the measurable matters of money, commerce, and dispute resolution, 'b)' is as or more important than 'a)'.

(we could do a Velasquez's "The Surrender at Breda" to really get to the sense of every agreement but I'm pretty crap at drawing and painting so I'll stick to short, baby food, contract language)

So now on to the parts of the clause:

"any legal dispute"

- it is important to refer to all legal disputes between the parties including all claims in tort or any other concept of law. This is to prevent a party trying to get out of arbitration from claiming that this is not a contract issue. (There is the issue of whether the dispute is of a "commercial" nature under the New York Convention but that's a whole other ball of wax.)
- This is also to clearly state that this is the only dispute resolution mechanism. There is no need to use words like "exclusively" as both the New York Convention and Federal Arbitration Act are clear that courts should stay their proceedings in favour of arbitration (if the clause is clear and unambiguous, and the subject matter is arbitrable.)

"arising from"

- I was in two minds on "arising from"and "related to" and rejected "related to" because a dispute may predate the agreement but may be related to it. The arbitration clause covers this agreement not all agreements in eternity between the parties. And "arising from" is a vast scope of disputes.

"binding"

- It is important to state that the process is binding. Parties will do anything to weasel out of an agreement (everything is fair in war and business.)

It is important to avoid words like "may demand" when you are not referring to the granting of some right from one party to another (Party A may attempt to file suit in Burkina Faso against Party B but that right is not B's to give so why mention it in the agreement between them?) No need to say the award is binding or that each party consents. If you say "the Parties agree to binding arbitration," no need for flowery prose on submissions, demands, and consents. Of course, this means the lawyers don't get to interpret and reinterpret the new words.

(and so I remember Shakespeare's Henry VI's view of lawyers.)

In my version, I mention the language and place of arbitration. That is very important in terms of cost and procedural implications. I don't mention the procedural law of the arbitration (the lex arbitri.)It usually follows the place of arbitration and is liable to become another bone of contention with opposing counsel in a negotiation.

You could think round and round about you decision about which procedural law you pick the implication of this or that procedural law but remember- first you have to come to the best decision on a different procedural law for the arbitration, then you have to negotiate it with the other side, and they will wonder why and push back at you and both sides will get bogged down unnecessarily. Instead of all that effort, you could just pick a reasonable, neutral, generally acceptable, place of arbitration, and let the procedural law follow the seat.


Finally, superfluous elements in AAA and Adams clauses:

Adversarial dispute resolution:

       - completely superfluous. If we say binding arbitration, we clearly do not mean "consensual mediation." This is not a mediation-arbitration clause. (Fewer words ---> better!)

Judgement on the award may be entered:

       - entering of awards in courts is regulated by the appropriate statute law, convention and the jurisdiction of the courts. Consenting to the exercise of rights that one cannot prevent the exercise of, is like saying, "Party A may obey the laws of Physics or attempt to fly to Krypton, and Party B consents to the same." If a judgement needs to hang on a particular fact, a judge will find one. There is no need for introducing language asserting jurisdiction one does not have.

Interim Arbitral Awards

I was faced with counsel on the other side that agreed to our choice of NY law in a contract but objected to our arbitration clause in the following manner:

"We have a policy against using arbitration, since it is expensive and doesn’t provide for injunctive relief."

This response shocked me because this was experienced legal counsel from a very large company saying this.

Their opinion on cost irritated me because the arbitration clause we had proposed referred to an institution which would appoint one arbitrator and use simplified procedural rules for small disputes (some institutions will, if the parties specify, even have documents-only procedures to keep costs low and procedures as short lived as possible.)

But the whole notion that injunctive relief is not available under arbitration got me thinking.

What is injunctive relief after all?

Injunctive relief is generally an interim order against a party acting in a certain manner while a dispute is ongoing and unsettled.  It prevents a party from "creating facts on the ground" or doing things that might make the court's final decision irrelevant (for example by taking all of its assets out of the country meaning a damages award has no money to draw on, or by irreparably damaging a company's reputation or leaking its confidential information, so that what ever the court orders, it will never be able to undo the damage)

Enabling legislation in various jurisdictions clearly states that arbitral tribunals can make interim orders that will be enforceable by state courts.

Essentially, an arbitration tribunal can make an interim order that is exactly like an injunction provided by a court, for the exact same reasons court would do so, and the under the relevant law, the court would enforce such an order.

For example, see the following sections in Portugal's arbitration law:


Article 21
Conditions for granting interim measures

1  - Interim measures requested under sub-paragraph a), b) and c) of paragraph 2 of article 20 is granted by the arbitral tribunal on the condition that:
a)
There is a serious probability that the requesting party will succeed on the merits of his claim and the fear that his rights will be harmed is sufficiently demonstrated; and
b)
The harm resulting from the interim measure to the party against whom the measure is directed, does not substantially outweigh the damage the requesting party wishes to avoid by the measure.

2 - The determination of the arbitral tribunal on the possibility as referred to in sub-paragraph a) of paragraph 1 of this article shall not affect the freedom of decision of the arbitral tribunal in making any subsequent determination on any matter.

3  - With regard to the interim measure request as made under sub-paragraph d) of paragraph 2 of article 20, the conditions set out in sub-paragraph a) and b) of paragraph 1of this article shall apply only to the extent the arbitral tribunal considers appropriate.

Article 27

Recognition or enforcement

1  - An interim measure issued by an arbitral tribunal shall be binding on the parties and, unless otherwise provided by the arbitral tribunal, shall be enforced upon application to the competent state court, irrespective of the circumstance of the arbitration in which it was issued taking place abroad, without prejudice to the provisions of article 28.

2  - The party who is seeking or has obtained recognition or enforcement of an interim measure shall promptly inform the state court of any termination, suspension or modification of that interim measure by the arbitral tribunal that has granted it.

3  - The state court where recognition or enforcement of the measure is sought may, if it considers it proper, order the requesting party to provide appropriate security, if the arbitral tribunal has not already made a determination with respect to security or if such a decision is necessary to protect the rights of third parties.

4  - The decision of the arbitral tribunal on the granting of a preliminary order or interim measure, and the judgement of the state court deciding on the recognition or enforcement of an interim measure of an arbitral tribunal, are not subject to appeal.


To go even further, in Switzerland, in a case in 2010,  a court said that interim measures of this kind by arbitral tribunals can both be more wide ranging that courts may provide, but also that enforcement of such interim measures may only be set aside in very limited circumstances.

In the US, in PACIFIC REINSURANCE MANAGEMENT CORP. et al v. OHIO REINSURANCE CORP. et al., 935 F. 2d 1019, the court said (para 14):

"Temporary equitable relief in arbitration may be essential to preserve assets or enforce performance which, if not preserved or enforced, may render a final award meaningless.1 However, if temporary equitable relief is to have any meaning, the relief must be enforceable at the time it is granted, not after an arbitrator's final decision on the merits."

Now, because of the silence of the Federal Arbitration Act on the issue in the US, there is some uncertainty about provisional or interim awards. But as a counter to that, one can say that a) there are state laws that fill the gap, such as section 7502(c) of the New York Civil Practice Law and Rules, which allow state courts to entertain requests for enforcement of such interim orders and b) that even when the courts narrow their deference to interim awards, they will simply apply the high bar they will apply in granting injunctive relief.

[It is also a question of semantics. In addition to measures that preserve the ability of the tribunal to decide the overall dispute, some courts will enforce interim measures or awards if they are "final", for example, if they completely settle discrete topics within the overall dispute]

So the appropriate position is that not that injunctive relief or similar measures becomes unavailable in arbitration, it is that arbitration will, at worst, provide as high a hurdle for such measures as courts. In any case, should you wish to obtain injunctive relief, a court will entertain such appeals.

An US court is not likely to simultaneously refuse injunctive relief in its own power to parties AND refuse to recognise and enforce injunctive relief type interim arbitral orders. There is no general policy against injunctive (just a high bar.)

In any case, to return to the question that started my examination of the issue, the other side agreed to NY law in any case so their position was probably ill-founded in any case.

To return to the rest of the world, in Saudi Arabia's law, Sweden's law, basically any country that has used the UNCITRAL Model Law On International Commercial Arbitration  ( as the basis for its arbitration legislation), the situation is clear - interim awards are ok and enforceable. the international trend is in favour of enforcing interim awards.

And one further final blow- one can still draft the arbitration clause to allow for/carve out certain types of injunctive relief in the event that interim orders are not recognised in a particular jurisdiction.

All this to say, among the many reasons one can bring up to hide one's discomfiture or ignorance of arbitration as an alternative dispute resolution mechanism, "arbitration does not provide for injunctive relief" is not a good one.

When is an arbitration "null and void, inoperative and incapable of being performed"?

The phrase “null and void, inoperative and incapable of being performed” (the “Phrase”) is contained in Article II.3 of the Convention On The Recognition and enforcement of Foreign Arbitral Awards a.k.a the New York Convention (“Convention.”)

If two parties, A & B, A located in Albania, and B located in Burkina Faso have an arbitration agreement in places (most often because of an arbitration clause in an commercial agreement between them) and a dispute arises between them, party A may start legal proceedings  in a national court in Albania where it feels it has "home-court advantage" At that point, the B may approach the court in Albania showing evidence of the arbitration agreement and seek a stay on the legal proceedings so as to allow arbitration to proceed. 

Article II.3 of the Convention specifies that a national court of a state that is a party to the Convention, has a positive obligation to stay its proceedings, and direct the parties towards arbitration unless it finds that the arbitration agreement is  “null and void, inoperative and incapable of being performed.” 

      When is the test applied?

A court applies the test only after it determines that the arbitration agreement exists (the clause is not constructed in a problematic and covers the dispute between A and B.) In an UK case,  Claxton Engineering Services Ltd v TXM Olaj-Es Gazkutato Kft ("Claxton"), the court refused to apply the same test ( included verbatim in the UK's Arbitration Act 1996) because it determined the arbitration agreement didn't exist. In an Indian case, Gas Authority Of India Ltd. vs Spie Capag, S.A. And Others ("Gail"), the Delhi high Court considered the Phrase as it was reproduced in section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961. In Gail, the appropriate point of application of the Phrase was determined to be before arbitration proceedings commence or during the arbitration proceedings.

      Who bear the burden of proof before the court

In an UK case, JSC BTA Bank v Mukhtar Ablyazov, Ildar Gayarevich Khazhaev, CJSC Tekhinvest, Konvis LLC, Paladioexport LLC, Citybestplus LLC, Colligate Investments Limited, ("JSC"), the court said that the burden of proof of showing that the agreement satisfies the test is on the party resisting such the stay of court proceedings, in our example A party A in Albania needs to convince the Albanian court that it shouldn't stay proceedins because the arbitration agreement between party A  and party B is "null and void, inoperative and incapable of being performed." [in the Gail case, for some reason, in spite of the clear language in the Indian statute, the court reversed the burden of proof on to the party arguing for arbitration, but this is very much against the prevalent trend.]

      Meaning of the phrase 

Often it is easier to know what something is not rather than what it is and you will see that in this blog entry. According to Lew in "Comparative International Commercial Arbitration": “null and void” is “where the arbitration agreement is affected by some validity right from the beginning”, “inoperative” is where the arbitration agreement ceases to have effect at some point, and “incapable of being performed” is where the arbitration cannot be set in motion.

      The entire phrase

In Bautista v. Star Cruises, ("Bautista"), an US Court of Appeal commented, the Phrase is only applicable to arbitration agreements where there is fraud, mistake, duress and waiver, and that the meaning of the words will be narrowed  to interpretations as may be shared across many international jurisdictions.

      The components

            Null and void

In Seidel v. TELUS Communications Inc., the Supreme Court of Canada held an arbitration agreement to be null and void where it attempted to waive a person’s statutory right (especially when the statute in question clearly stated as void any agreement attempting to do so.) Therefore when legislation says a right may not waived by contract, the court says that an arbitration on that issues is"null and void" (the court appears to have mixed up public policy criteria applicable at the enforcement stage in to the early arbitration referral stage but that is worthy of a separate article. 

            Inoperative

In a case in Alberta, Canada, Kaverit Steel and Crane Ltd. v. Kone Corporation ("Kaverit"), the Court of Appeal said if a dispute is between a number of parties and only two of them are parties to an arbitration agreement, inconvenience, splitting of a dispute between forums, or overlapping litigation, cannot be a valid criterion for assessing whether an arbitration is “inoperative.” 

            Incapable of being performed

In Travelport Global Distribution Systems  B.V.  v.  Bellview Airlines Limited, the United States District Court ruled that an arbitration agreement was not “incapable of being performed,” even though an arbitration clause referred to a non-existent governing institution and said that the party "may" use arbitration (i.e. the language indicated that arbitration was not a mandatory dispute resolution mechanism.) In Pacszy v Haendler & Natermann GmbH ("Pacszy"), the English Court of Appeal said the phrase “incapable of being performed” doesn't apply just because a party is unable to take part in or to attend proceedings. Going in the other direction, it appears that German courts take the pecuniary inability of one party to participate in an arbitration proceeding as rendering the agreement to be incapable of being performed. In a famous set of US cases, an arbitration clause was seen as unenforceable because of the agreement between and Iranian and US entity specified Iran as the seat of arbitration.

            The arbitration agreement versus the main agreement (the "Separability" doctrine)

Courts in various countries have formulated the "Separability" doctrine that separates the arbitration clause from the rest of the agreement as it had been entered into between parties A and B entirely separate from the main agreement (which is important otherwise a party could just attack the main agreement neutralising the arbitration clause it finds inconvenient.)  In an UK case, El Nasharty v J Sainsbury Plc, an English court stated that when a party is seeking to establish that an arbitration agreement is null and void, inoperative, or incapable of being performed, on account of duress, the party must establish it specifically for the arbitration (clause) agreement itself rather than of the main agreement .  The same reasoning was used by the Alberta Court in Kaverit, where the judge said that the arbitration clause will not be inoperative just because the main agreement that contained it is terminated.

            Degree of Review

Finally, the depth of review that courts conduct when they assess whether a request for a stay meets the conditions set out in the Phrase in the ARticle II(3) of the Convention. The arbitration friendly French civil code allows only a prima facie review. The Swiss courts will undertake a limited review for arbitrations conducted in Switzerland.  The UK and Canadian courts, including in the cases examined here, may conduct an in-depth examination of the validity of an arbitration agreement. 

            Conclusion

The phrase “null and void, inoperative and incapable of being performed” embodies certain conditions under which the arbitration process may be attached or delayed. It affords courts to grab jurisdiction from the arbitration process (for good or bad reasons) and parties to delay the arbitration process by engaging courts in this analysis. However, generally across the board, barring some exceptional situations, courts adopt a fairly narrow approach to its interpretation.