How to Draft Better Arbitration Terms in your Commercial Agreements

Arbitration agreements are often treated as a “one-size-fits-all” in commercial contracts without being given much thought. This approach has the potential to increase time, costs and complexity for the parties in resolving disputes.

A well-drafted arbitration agreement mitigates the risk of future disputes and should set out the types of disputes that can be referred to arbitration.

Some critical aspects to consider are:

  • Language: arbitration clauses should consist of plain English language.. In international arbitration cases, the clause should identify the language of the arbitration especially where parties are from countries with different first languages.
  • Parties: clearly identify all parties affected by the clause. This can be a problem where the contractual counterparty is newly incorporated without assets or if it is a government owned entity. The arbitration agreement should include the party against which any arbitration award will be enforced.
  • Effective date: specify when the clause will commence and when it will terminate, if ever, and whether the clause can be modified in the future.
  • Governing Law: the arbitration agreement is a contract in its own right and the law governing the arbitration agreement can differ from the governing law of the substantive contract.
  • Binding / Non-binding: be clear about whether the arbitration is intended to be binding or non-binding. A binding arbitration means that the arbitrator’s decision on a specific dispute is final. Courts will enforce that decision and neither party can appeal or fail to act according to the decision. A non-binding clause allows the disputing parties to freely reject the arbitrator’s decision. They may then, for example, take the dispute to court for final determination.

Violation:  clearly specify the consequences for violating the clause. Common violations are when parties seek to file a court proceeding, disregarding the fact that they agreed to settle disputes through arbitration. Signing a contract containing an arbitration clause means the parties forfeit their right to file a court proceeding and doing so constitutes a violation. The non-violating party may present the arbitration clause to the judge in a court proceeding and, if found to be valid, the judge may order the parties to pursue arbitration instead according to the instructions in the contract.

The Advantages and Disadvantages of an Arbitration Clause

Advantages to arbitration are that it is generally faster and more efficient than litigation in court. A properly drafted arbitration clause essentially forces parties to arbitrate by restricting court proceedings.

Arbitration can be very flexible and parties can set up their own schedule to determine the dispute, rather than a court mandating that timetable.

Disputing parties may also choose their own arbitrator which ensures that the arbitrator has more technical knowledge of the specific issues and industry relevant to the dispute.

Disadvantages particularly in binding arbitration include that once a determination has been made, the decision is final. Unlike a court ruling, arbitration decisions cannot be appealed. Grounds for appealing or setting aside an arbitration decision include if a party proves that the arbitrator was biased or unfair when making their decision or proof of a public policy violation, both of which can be very difficult.

Further, the disagreement between the parties must fall within the scope of the arbitration agreement to be determined in this way and if the disagreement is outside of the scope agreement, the arbitration clause cannot be relied on.

Finally, for a variety of reasons, some parties prefer to litigate in court and to avoid arbitration altogether, therefore, in preparing any contract it is important to consider tailoring any arbitration clause carefully to the parties’ needs or not including any arbitration clause at all.

The Commercial lawyers at Burke Lawyers have the experience and expertise to assist you with any contract preparation and negotiation and any formal agreements including Shareholder, Unit Holders, Partnership or Franchise.

For tailored assistance and legal advice please contact us today +61 3 9822 8588 or you can email us here.


I would like to receive Burke Lawyers Newsletters