CHILE: An Introduction to Dispute Resolution: Arbitration

Drafting Arbitration Agreements: A Practical Approach

The parties to a given dispute may only resort to arbitration if they have agreed to do so in an arbitration agreement. Consequently, it is key that a proper arbitration agreement is in place, providing certainty that the dispute will actually be resolved by an arbitral tribunal, which will ultimately issue a binding award for the parties. However, in practice, this task can be harder than it may seem.

Problem statement 

The endeavour of drafting arbitration agreements is usually overlooked for various reasons. Sometimes, these agreements are drafted after protracted and depleting negotiations, when the parties and their advisers are exhausted and have “lowered their guard,” so to speak; at other times, these clauses are discussed when the parties are thrilled with the perspective of the new business they are entering into, failing to see beyond its closing, neglecting the possibility that disputes could arise in the future. For this reason, these stipulations are customarily known as “midnight clauses.”

This is how poorly drafted arbitration clauses - containing ambiguous, incoherent, or confusing terms - make their way to the final version of the contract. Let’s look at some examples.

• Sometimes the parties stipulate that any controversy “may” be submitted to arbitration. By using a facultative expression, the wording raises doubts as to whether the parties intended to deprive the State courts of their power to resolve their dispute, in order to submit the same to arbitration.

• A related doubt arises when an arbitration clause is inserted in a contract and, in a different clause, the parties submit themselves to the jurisdiction of the State courts of a given country.

• Another case occurs when the parties designate the institution which will administrate the arbitration in an obscure or confusing manner, such as “an arbitration conducted by the International Chamber of Commerce («ICC») of Geneva, Switzerland.” Of course, the ICC is located in Paris; and, simultaneously, a Chamber of Commerce exists in Geneva. Under such circumstances, it is unclear whether the parties’ intention was for the arbitration to be administered by the ICC, or by the Geneva Chamber of Commerce.

• Occasionally, impossible or extremely hard instructions for the conduction of the arbitration proceedings are included; v.gr., when the parties stipulate that the proceedings cannot last more than 30 days, which is simply unrealistic.

All of the above and other cases of defective arbitration agreements are commonly referred to as pathological clauses, an expression coined in 1974 by Frédéric Eisemann. The expression alludes to a set of stipulations whose common denominator is that –prima facie– reflects an intention to resort to arbitration, albeit manifested in inaccurate or equivocal terms. Hence, despite being valid stipulations (in the legal sense of the word), their practical effectiveness can be called into question, and it frequently is. The outcome is that the pathological clause prevents or hampers the proper and normal conduction of the arbitration.

The legal solution provided by State courts 

While exercising their assistance powers - during the process of establishing an arbitral tribunal - and their power of control over the arbitration - when reviewing arbitral awards - State courts of various jurisdictions have issued judgments explaining the legal treatment for these pathological arbitration agreements.

Sophisticated venues tend to choose a highly benevolent interpretation regarding the enforceability of arbitration clauses. If the pathology can be cured by the laws of the arbitral seat, or by the judge’s interpretative efforts, the dispute will be referred to arbitration.

For instance, in Insigma Technology Co Ltd v Alstom Technology, the Court of Appeal of Singapore found that a principle of arbitration law exists whereby the interpretation of an arbitration clause which renders the clause effective must be preferred: if the parties’ clear intent was to resolve their differences in arbitration, such intent must be enforced, regardless of defective, ambiguous, or incomplete wording. The same criterion was endorsed by the Higher Court of Singapore in HKL Group Co Ltd v Rizq International Holdings Pte Ltd.

Similarly, in Mangistaumunaigaz Oil Production Association v United World Trade Inc, the English court ruled that the parties’ stipulation to submit their differences to “[a]rbitration, if any, by ICC Rules in London” did not prevent the arbitration from being held, since the expression “if any” was simply an unnecessary or irrelevant phrase which had to be disregarded.

A judgment by the Provincial Court of Logroño (Spain) in the matter of AIG Europe, SA v Mecanizaciones Aeronáuticas, SA, decided that when facing a pathological arbitration clause, the judges must presume that the parties’ intention was to actually resort to arbitration and, thus, enforce such clause. A similar rationale can be found in the decision rendered by the Provincial Court of Madrid, in the matter of Maintenance Development, SA v Vector Software Factory, SL.

In the US, following the enactment of the Federal Arbitration Act, in Moses H. Cone Memorial Hospital v Mercury Construction Corp, the Supreme Court ruled that, as a matter of federal policy, any doubt created by the drafting of the arbitration agreement should be resolved in favour of arbitration. This precedent, with a clear pro-arbitration approach, has guided case law for the following decades.

All these precedents attest to the existence of a principle of international law known as favor arbitralis, whereby, whenever possible, the courts should try to preserve or uphold the parties’ agreement to submit to arbitration.

A practical solution 

However, the aid of State courts may not be sufficiently timed, and, in any event, it should not be taken for granted.

Any objection regarding the enforceability of a pathological arbitration clause will give rise to judicial proceedings which will entail extended timeframes and increased costs, thus postponing the moment when the arbitral tribunal will begin reviewing the merits of the parties’ dispute.

Furthermore, even in “pro-arbitration” jurisdictions, the State court will always be subject to limitations in construing arbitration clauses since it will be barred from redrafting or amending their wording. Hence, if the State court is not presented with sufficient evidence that the parties truly intended to submit their differences to arbitration, it will have no choice but to deny validity to the pathological arbitration agreement.

What is the practical solution to this problem?

Experience demonstrates that when drafting an arbitration clause, the best option will always be the easiest: to use the model arbitration clauses made available to public by renowned arbitration institutions.

These model clauses have been carefully drafted by experts, considering the best practices and principles of modern arbitration, and using a simple but clear language, which rules out any possibility of ambiguities or misinterpretations.

That is why model arbitration clauses provide a solid foundation for fair and efficient dispute resolution, avoiding the uncertainties and complexities associated to poorly worded clauses, guaranteeing a smooth arbitration and more satisfactory results, which is precisely what the parties have surely sought when stipulating an arbitration agreement.