The purpose of this bulletin, the third in our “Dispute Resolution Clauses - Two Minute Drafting Tips” series, is to provide parties involved in negotiating commercial agreements with quick, actionable tips for crafting effective dispute resolution clauses. This bulletin discusses drafting considerations related to the following:
- Decision to Arbitrate; and
- Scope of Arbitration.
Parties should consider at the beginning of a new business relationship or transaction whether arbitration or litigation is preferable for resolving potential future disputes. Arbitration can have many advantages compared to litigating a dispute in the local court system, including finality, efficiency, the ability to select expert decision-makers, flexibility of process, privacy and confidentiality, and enforceability of arbitral awards.
Once the parties have decided to use arbitration for dispute resolution, it is important that the arbitration clause gives effect to their intentions. It should be clear and enforceable so that there isn’t a dispute over the applicability or meaning of the arbitration clause down the road.
At a minimum, the clause must clearly provide for and mandate arbitration. While this might sound obvious, in practice, arbitration clauses often continue to include optional or permissive language. When a clause sets out the possibility of arbitration, or where language permits a responding party to decline arbitration, that is not sufficient to require parties to arbitrate, even where possible arbitrators are named and/or procedures for constituting arbitral tribunals are set out.
The arbitration clause should also clearly set out the scope of disputes that are subject to arbitration and carve out any exceptions that are intended. If any parties in addition to the contracting parties are party to the arbitration agreement or if any of the contracting parties are not parties to the arbitration agreement, that should also be clearly set out.
The following tips should be considered:
- Use the language “shall” or “must” as opposed to “may” where the intention is to arbitrate some or all of the disputes.
- Clearly express the scope of disputes that are subject to arbitration – consider whether it should be all disputes or some disputes; whether the clause should cover disputes arising under the agreement, relating to the agreement, or relating broadly to the entire relationship; and whether contractual and non-contractual claims are both to be arbitrated.
- Clearly express whether any non-parties, and whether successors or assigns of the parties, are bound by the arbitration clause.
- Avoid inconsistencies or contradictions between the arbitration clause and other provisions relating to dispute resolution, jurisdiction, or governing law (for example, clauses pertaining to a court’s exclusive or non-exclusive jurisdiction or clauses contemplating expert determination for certain disputes).
- Draft carefully when dealing with multiple or related contracts to ensure the arbitration clause operates as intended with respect to disputes relating to the various contracts.
