Arbitration clauses in international contracts

Arbitration is a private process where parties to a commercial contract agree (Arbitration Agreement) to let an arbitrator^[1] (Arbitrator) make a binding decision on a dispute between them, without recourse to national Courts.  The Arbitrator receives evidence, hears arguments and applies relevant law to reach a binding decision, called an award (Award).  The Arbitrator’s decision is final.  A right to appeal is available to avoid abuse of process but is generally restricted to matters of procedural fairness.

Arbitration can apply to both domestic and international contracts.  In both instances the Arbitration Agreement changes the fundamental rights of the parties by removing their right to legal recourse in national Courts.  If a dispute arises, Courts will enforce a valid Arbitration Agreement by referring matters to Arbitration^[2] for final resolution.

What is international arbitration?

Commercial arbitration is “international” if the parties have their places of business or residence in different countries, or they expressly agree that the subject matter relates to more than one country^[3].  The Award issued in an international commercial arbitration is called a foreign arbitral award (Foreign Award).

Recognition of foreign arbitral awards

The legal basis of international arbitration rests on the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (New York Convention) which requires countries that are signatories to recognise and enforce foreign arbitral awards.^[4]  In Australia, foreign arbitral awards are recognised under the International Arbitration Act 1974 (Cth)(IAA).

Foreign Awards are enforceable in approximately 86% of countries^[5] worldwide, making arbitration the dispute resolution mechanism of choice in international transactions.  Freedom of contract

Party autonomy, driven by the principle of freedom of contract, is a key doctrine of arbitration.  The doctrine of party autonomy is based on the consensual agreement of the parties.  Parties have broad freedom to decide how and where their dispute will be decided, provided that they comply with the laws at the place of arbitration and those governing the Arbitration Agreement.

What is an Arbitration Agreement?

An Arbitration Agreement is any agreement to refer present or future disputes to arbitration.  It can be a separate agreement between the parties, be included as a clause within another contract, or even recorded in an email.  An international commercial arbitration agreement must, however, be in writing.^[6]

The Arbitration Agreement should be clear, in writing, and, at a minimum, address the language, seat, governing law and number of Arbitrators for the Arbitration.  Most arbitration institutions have “model clauses” that can be inserted into contracts that will refer future disputes to be arbitrated under their rules.  For example, the London Court of International Arbitration (LCIA) model clause reads as follows:

“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.
The number of arbitrators shall be [one/three].
The seat, or legal place, of arbitration shall be [City and/or Country].
The language to be used in the arbitral proceedings shall be [    ].
The governing law of the contract shall be the substantive law of [    ].”^[7]

Some areas for caution

As discussed above, party autonomy and consensual agreement is a key aspect of arbitration.  If an Arbitration Agreement is not brought to the other party’s attention it could be deemed invalid due to lack of consent.  Care needs to be taken to ensure that an Arbitration clause is brought to the other parties attention and not buried in the body of a standard form contract.

Arbitration clauses are also problematic in consumer contracts, due to the parties’ unequal bargaining power and can be held to be unfair.

Where there is no Arbitration Agreement, or the agreement is invalid, the parties will need to revert to Court system of the jurisdiction where the contract is performed to resolve the dispute at significant cost.

Links and further references

Legislation

Commercial Arbitration Act 2013 (Qld)

International Arbitration Act 1974 (Cth)

United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958)

Further information about international contracts

If you need advice on incorporating an Arbitration clause in a contract where the parties are in different countries, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] The number of arbitrators can vary but is typically either one or three.  If more than one arbitrator is appointed, it is referred to as a tribunal.

[2] Article II.3, United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).

[3] Schedule 2, International Arbitration Act 1974 (Cth).  Article 1(3)(c), UNCITRAL Model Law on International Commercial Arbitration (As adopted by the United Nations Commission on International Trade Law on 21 June 1985, and as amended by the United Nations Commission on International Trade Law on 7 July 2006).

[4] Article III, United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).

[5] 168 Signatory Countries.

[6] Article II.1, United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).

[7] LCIA Model Arbitration Clause – Future Disputes.

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