As arbitration continues to gain traction as a preferred method of dispute resolution for cross-border transactions and domestic disputes, companies around the world are being exposed to the significant, costly consequences of poorly drafted arbitration clauses, according to Corrs Chambers Westgarth.
Arbitration is growing in popularity. Most leading arbitral institutions continue to experience strong growth, with the International Chamber of Commerce alone reporting nearly 900 new arbitrations internationally in 2023 (a 25% increase since the year before). However, as outlined in Corrs’ newly released Guide to drafting arbitration clauses, the known benefits of arbitration, such as controlling timing, costs and process, and keeping disputes out of court and away from the public eye, are at risk if arbitration clauses are not properly considered when commercial contracts are first drafted.
Also known as ‘midnight clauses’, arbitration clauses are rarely given the time and attention required to ensure that they are appropriately scoped and, despite their significance, are often the last provisions to be negotiated, according to Corrs’ Head of Arbitration, Nastasja Suhadolnik.
“There are countless examples of companies being forced into complex, expensive preliminary disputes about the interpretation of an arbitration agreement – and that’s before the actual arbitration proceedings can even commence,” she said.
Ms Suhadolnik observed that some of the biggest errors come from imprecise language in the drafting of the arbitration clause. This can render the clause unenforceable, for example when language is ambiguous about whether disputes are to be settled in court or by arbitration.
“No one wants to think about resolving disputes before a contract is even finalised. However, properly considering each element of an arbitration clause at the outset is vital to safeguard companies in case an agreement turns sour. These midnight clauses need their time in the sun,” Ms Suhadolnik said.
Corrs has prepared a Guide to drafting arbitration clauses to help parties negotiate arbitration clauses that are enforceable, efficient and fit for purpose. It outlines the basic components of arbitration agreements, as well as how organisations can tailor them to suit their needs.