INTRODUCTION
Arbitration offers a fast and efficient alternative to lengthy courtroom battles. Yet a poorly drafted arbitration clause can transform this benefit into a costly legal nightmare. The case of Enercon (India) Ltd. v. Enercon GmbH (2014)[1] stands as a reminder of how conflicting arbitration terms can lead to years of litigation and huge financial losses. Rather than serving as an efficient method for dispute resolution, a faulty clause can trap parties in prolonged legal disputes. So, let’s explore some common drafting mistakes and provide practical tips to help you draft clear and effective arbitration clauses.
COMMON DRAFTING MISTAKES
- Ambiguous Language: “May” Versus “Shall”
A common error in drafting arbitration clauses is using words such as “may” instead of “shall.” In Union of India v. Bharat Engineering Corporation (1977)[2], the court emphasized that optional language creates loopholes, enabling a party to bypass arbitration and resort to litigation. When a clause states that disputes “may” be referred to arbitration, it weakens the binding nature of the agreement.
Solution: Use clear and mandatory language. For example, “All disputes arising under this agreement shall be resolved through arbitration”, this clause leaves no room for ambiguity and binds both parties to the arbitration process.
- Failing to Define the Seat of Arbitration
The “seat” of arbitration is more than just a geographical point, it determines the legal framework and procedural rules governing the arbitration. In Enercon (India) Ltd. v. Enercon GmbH (2014)[3], conflicting references to governing laws led to uncertainty and prolonged litigation. Similarly, Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (2012)[4] highlighted how a poorly defined seat can result in overlapping jurisdictional issues.
Solution: Clearly state the seat of arbitration. For instance, “The seat of arbitration shall be Amritsar, India, governed by the Arbitration and Conciliation Act, 1996.” This clause prevents jurisdictional conflicts and streamlines the process.
- Confusing the Seat with the Venue
The seat and venue of arbitration are not interchangeable. The seat defines the legal regime under which arbitration is conducted, whereas the venue is merely the physical location for hearings. Confusing these two words can create enforcement problems, as seen in cases where disputes over the applicable legal framework arise due to ambiguous drafting.
Solution: Differentiate between the seat and venue. A clause might state, “The seat of arbitration shall be Amritsar, India, while hearings may be held at a mutually agreed venue.” This ensures that the legal basis remains consistent even if the physical location varies.
- Unclear Appointment of Arbitrators
The process for appointing arbitrators is critical to ensuring a smooth arbitration process. Drafting a clause that leaves the method of appointment unclear can lead to deadlocks or delays. An even number of arbitrators, for example, might result in a tie if the arbitrators disagree, which could force a court to step in and disrupt the process.
Solution: Specify a clear appointment process that results in an odd number of arbitrators. For example, “Each party shall appoint one arbitrator within 30 days, and the two arbitrators shall jointly appoint a third arbitrator to serve as the presiding arbitrator.” This clause helps avoid deadlocks and minimizes delays.
- Not Specifying the Language of Arbitration
In international or multilingual situations, failure to specify the language of arbitration can lead to misinterpretations and costly translation disputes. Without a clear mandate, parties might submit evidence or arguments in different languages, creating confusion and further delays.
Solution: Mandate a single language for all proceedings. A simple statement like “All arbitration proceedings and documents shall be in English” helps ensure that both parties understand and follow the same language, which reduces the risk of miscommunication.
- Ignoring the Governing Law
Another critical mistake is failing to designate which country’s substantive law will govern the arbitration. Without a governing law, a later dispute about whether local or foreign law applies can arise between the parties, leading to further delays and litigation.
Solution: Include a clear governing law clause. For example, “This agreement shall be governed by Indian substantive law.” This provides certainty and a common legal statute for resolving disputes.
- Overlooking Costs and Fees
Conflicts may arise even after the arbitration procedure has started if there is uncertainty about the distribution of arbitration costs. The effectiveness of arbitration may be compromised if a clause is silent on cost-sharing because each party may later dispute who should pay for particular costs.
Solution: Predefine how costs will be allocated. A clause such as “Unless the tribunal orders otherwise based on proven misconduct, all costs and fees associated with the arbitration shall be shared equally by the parties” can help prevent further disputes and maintain the cost-effective nature of arbitration.
- Allowing Judicial Intervention
One of the main advantages of arbitration is that it avoids the delays of traditional court litigation. However, if the arbitration clause permits judicial appeals or interference, the process may be dragged back into the courts, defeating its purpose.
Solution: Ensure that the clause limits judicial intervention. Including a statement like “The arbitral award shall be final, binding, and enforceable without recourse to further judicial review”, this clause will ensure the finality of arbitration and protect the process from unnecessary court interference.
LESSONS FROM CASE LAW
In Enercon (India) Ltd. v. Enercon GmbH (2014)[5] Conflicting arbitration terms led to a prolonged legal battle that drained resources and time. The lack of clarity regarding the seat of arbitration created jurisdictional confusion and allowed both parties to waste valuable years in litigation. This case is a clear example of how even a single drafting error can transform an efficient dispute resolution tool into a complex legal dispute.
Similarly, Union of India v. Bharat Engineering Corporation (1977)[6] teaches us that using ambiguous language such as “may” instead of “shall” can make an arbitration clause ineffective. These loopholes can permit a party to bypass arbitration entirely, eventually undermining the entire dispute-resolution mechanism.
The decision in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (2012)[7] further illustrates the significance of defining the seat of arbitration. Overlapping jurisdictional issues and conflicting interpretations of the applicable law delayed the resolution of disputes, causing considerable financial loss. These cases support the idea that every part of an arbitration clause, from the choice of words to the clear definition of procedural rules, must be carefully drafted.
PRACTICAL TIPS FOR DRAFTING EFFECTIVE ARBITRATION CLAUSES
Consider the following tips when drafting an arbitration clause:
- Use Clear and Mandatory Language: Replace permissive terms like “may” with decisive words such as “shall” to remove ambiguity.
- Clearly Define the Seat: Specify the seat of arbitration to determine the applicable legal framework, for example, “The seat of arbitration shall be Amritsar, India.”
- Differentiate Seat and Venue: Make sure to distinguish the legal seat from the physical venue of hearings.
- Establish a Clear Appointment Process: Provide a clear method for selecting arbitrators that avoids deadlocks, such as appointing an odd number of arbitrators.
- Specify a Single Language: Specify the language for all arbitration proceedings and documents to prevent misunderstandings.
- State the Governing Law: Clearly state which country’s substantive law will govern the agreement.
- Address Costs Upfront: Include a clause that outlines how costs and fees will be shared to avoid later disputes.
- Limit Judicial Intervention: Confirm that the arbitral award is final and binding, preventing unnecessary court challenges.
CONCLUSION
Arbitration clauses are often treated as boilerplate provisions, copied from old contracts without a second thought. However, a single mistake can turn arbitration from a quick, cost-effective solution into litigation, delays, court battles, and rising costs.
Each of the mistakes discussed above has the potential to:
- Delay dispute resolution for months or even years
- Make arbitration unenforceable, forcing parties into litigation
- Increase legal costs due to procedural uncertainties
- Create jurisdictional conflicts, leading to intervention by courts
A well-drafted arbitration clause should be clear, complete, and tailored to the specific needs of the parties. The seat, venue, governing law, arbitration rules, language, and number of arbitrators should be carefully selected to avoid ambiguity and ensure smooth proceedings. Remember that an arbitration clause is not just a standard clause but a critical component of our contract. Taking the time to draft it carefully can save one from costly delays and ensure that disputes are resolved efficiently and fairly.
Author(s) Name: Uttamjit Singh (Chandigarh University)
References:
[1] Enercon (India) Ltd. v. Enercon Gmbh [2014] 5 SCC 1.
[2] Union of India v. Bharat Engineering Corpn. [1977] SCC OnLine Del 45.
[3] Enercon (n 1).
[4] Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., [2012] 9 SCC 552.
[5] Enercon (n 1).
[6] Union (n 2).
[7] Bharat (n 4).
